Capital Markets Update – Q2 2024

Capstone Partners Q2 2024 Capital Markets Update

Tricks or Troughs? Is the Bottom Finally Here for M&A?

As summer draws to a close and autumn sweeps in, dealmakers, business owners, and capital providers are eager to know if we have finally reached the trough of this 24+ month downcycle for middle market (MM) merger and acquisition M&A activity. Will the third and fourth quarters be the start of rebounding activity after the September 18^th interest rate cut, or will we be haunted by the hope of stabilization until mid-2025? The results of Q2 2024 may have some clues to guide us.

Deal volume has only increased three times quarter-over-quarter (QoQ) during the ten quarters since Q4 2021. The first two increases were in Q2 of 2022 and Q4 of 2023—both quarters were followed by volume declines. The third increase just took place in Q2 2024, with M&A volume rising 1% QoQ. A small, but noteworthy gain.

What stands out even more prominently in Capstone’s M&A analysis, is that Q2 revealed significantly more positive metrics than any other time since Q4 2021:

• Average disclosed deal value is up 31% year-over-year (YOY).
• Average EBITDA multiple outpaced Q2 2023 at 9.1x.
• Deals by public strategics are up 23.6% QoQ.

Further, while analyzing 1H earning call transcripts, our Market Intelligence team report that MM M&A advisors are prepared for a “stronger than average, multi-year M&A upswing,” stating:

• The strongest and deepest bench of professionals in history with key additions of senior talent to ensure best positioning.
• Momentum across multiple business lines.
• A strong internal pipeline as CEO confidence strengthens (up 28.6% YOY).
• Expectations that clarity following November presidential election will be relatively uneventful for the current M&A markets, with a step function increase as sponsors return.

The remainder of 2024 may indeed have a few more ticks and turns up its sleeve, but those prepared to adapt will be best positioned to seize the opportunity—or outmaneuver the challenges—that lie ahead.

Olivia FerrisChief Operating Officer, Capstone Partners

On the topic of sponsor activity, for the first time in ten quarters Capstone reported a 5.5% QoQ increase in private equity (PE) transactions as sponsors mobilize their time, talent, and capital in anticipation for a busy 2025. The PE fundraising environment has remained resilient as well, with volume outpacing 2023 ($276 billion though 1H 2024), but total fund count remained low. Our Equity Capital Markets team highlighted that 2024 annual growth equity investments are set to reach $204 billion, outpacing 2023 annual levels which totaled $146 billion.

Platform deals for sponsors increased 21.7% QoQ, and capital overhang grows evermore abundant, exceeding $1.6 trillion (and evermore impatient!). However, Q2 2024 represented the first time since Q2 2022 that add-on acquisitions saw a decline in volume. As the median buyout holding period becomes increasingly elongated, sponsors will likely look towards new platform opportunities to justify limited partner (LP) fundraising.

To answer this shifting dynamic, Capstone is aggressively strengthening its PE solutions and has launched a dedicated buy-side advisory group offering both add-on acquisition advisory for existing PE platforms, as well as platform searches and retained buy-side/outsourced business development.

The advisor community dedicated to serving these roll-up strategies remains fragmented, and existing product offerings in the arena lack the depth of industry knowledge housed in the industry groups of a sell-side M&A practice. Capstone’s new solution positions our industry bankers in the   exploration and execution of buy-side mandates to help win new clients, vet target lists, and evaluate targets. This exercise will help us deliver an industry-leading buy-side product and facilitate access to fast-growing private equity-backed companies and their investors. With average pipelines across the market meaningfully higher YOY and QoQ, and with valuations on the rise for companies with profitability and scale, now is the time to ask, when will all this pent-up activity convert into fee events? General sentiment is still that we are indeed plateauing in terms of MM M&A volume, and the trough came in Q1. There is “cautious optimism” in the next three months of the year, but the market remains focused on 2025-2026 outlook vs. 2024 results, going so far as to speculate that 2025 estimated revenue levels for M&A advisors could be above 2021 high water marks.

If we are to see record-breaking liquidity events in the next 12-24 months, it is important for advisors to identify and navigate their clients through all the transaction complexities, including the often-overlooked and darker side of negativity synergies. Understanding and anticipating potential pitfalls is crucial for any successful M&A strategy; so, in this quarterly update we will take a deeper dive into seven tips for managing negative synergies: “The Hidden Pitfall of Mergers & Acquisitions” written by Capstone’s Financial Advisory Services team.

The remainder of 2024 may indeed have a few more tricks and turns up its sleeve, but those prepared to adapt will be best positioned to seize the opportunity—or outmaneuver the challenges—that lie ahead.

Download our full Q2 2024 Capital Markets Update Report Publication:

Request instant access to the full Capital Markets Update for a deep dive into recent Middle Market activity and trends including:

• Key considerations for middle market business owners regarding dry powder levels, buyer appetite, lending conditions, and M&A pricing trends.
• A breakdown of the top sectors preferred by Capstone’s sponsor network through YTD Q2 2024.
• An overview on equity private capital market conditions, featuring Capstone’s Equity Capital Advisory Group.
• Seven recommendations for managing negative synergy in an M&A process, according to Capstone’s Financial Advisory Services Group.