Marc Cooper Explores the Factors Holding Back a Full Recovery in the Overall M&A Market and What It Will Take for It To Rebound

Powering Up M&A Activity: What Will It Take?

by CEO Marc S. Cooper

The merger and acquisition (M&A) world finds itself at an impasse in mid-2024. While deals among publicly traded companies have begun rebounding, a backlog of unsold assets on the books of private equity funds has held back a full recovery in the overall M&A market.

Lingering inflation fears, interest rate uncertainty, enhanced antitrust enforcement and a new ban on noncompete agreements all have posed a short-term drag on acquisitions, divestiture and capital-raising activity.

Beyond that, there is something more fundamental at play. Simply put, it is hard to get deals done when there is a disconnect in expectations between buyer and seller. That, more than anything else in my view, is preventing a full-spectrum M&A rebound.

The good news is that all the building blocks of an M&A renaissance are in place. The U.S. economy is not burdened with a lot of distressed assets. Corporate earnings are flush. CEOs are upbeat. The public and private capital markets have sufficient dry powder.

So why haven’t the animal spirits fully returned to the M&A market—and, more crucially, when might they be rekindled? My sense is that we are looking at a longer recovery process than we have seen historically.

What is still missing, particularly in the private equity arena, is price equilibrium, the point at which both parties in a negotiation discover a fair market value perceived as mutually advantageous.

To understand why, consider the monetary policy whiplash of the last 15 years. You had a near-zero interest rate environment for much of the period following the Great Financial Crisis, and then again during the pandemic.

After global supply chain disruptions triggered an inflation spike, the U.S. Federal Reserve responded with one of the hardest monetary policy pivots in years, embarking on an eye-watering 525-basis-point rise in interest rates from March 2022 to July 2023.

The sheer velocity and scale of that credit-tightening swing was something many business leaders and financial professionals experienced for the first time. Along the way, these gyrations have had a disorienting impact on deal valuations.

Acquisitions that made sense in an easy-money environment look shakier in a higher interest rate one. In some instances, assets will need to be repriced—even significantly marked down. Conversely, owners of quality businesses, eyeing the prospect of even higher valuations in the future, may be in no hurry to sell.

Hence, the considerable pent-up deal demand. The median holding period for American private equity investments exited in 2023 was 6.4 years, according to data compiled by PitchBook. That is the first time it has eclipsed the six-year mark since 2015.

Private equity funds have an estimated $3.2 trillion backlog of unsold portfolio assets that will need to be dealt with in order to return capital back to limited partners. According to S&P Global, dry powder capital held by private equity funds topped $2.5 trillion by the end of last year.

Some funds are already coming up with creative approaches to free up capital via secondary buyouts with other private equity groups incentivized with performance-based earnouts. Others have focused on capital and dividend restructuring of portfolio companies to free up resources.

More encouragingly, we’ve seen the return of blockbuster deals among corporates in the first half of 2024, such as Warren Buffett-backed Capital One’s $35 billion takeover of Discover Financial and Home Depot’s $18 billion deal for building products supplier SRS Distribution.

Powered by other deals in the technology, finance and energy sectors, takeovers in the $10 billion-plus range more than doubled in the first three months of 2024 compared with the same period last year.

Now that the easy-money era is firmly behind us, for this emerging M&A rebound to really soar, we will need to allow for extended due diligence timelines and for buyers and sellers to get real about the underlying value of their assets. That process is still in the early innings. When it gets underway, though, get ready for some serious deal-making exuberance.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. This article originally appeared on Forbes.com.