Some deal professionals are hopeful that M&A will improve in 2024, but several remain muted on how much of a bounceback to expect, with many citing the same landscape that left them nonplussed last year. Here’s more on what private equity, investment banking and other executives predict will happen in the upcoming year.

What a difference a year makes. Or in the case of this year – not much difference at all. In Mergers & Acquisitions’ 2023 Outlook, dealmakers voiced concern about the economy and geopolitical conflicts impacting M&A, and generally lacked conviction on which way the deals market was headed. Turns out they were right.

Flash forward to our survey for 2024 and not much has changed.

While buyers and sellers are typically cautious in a presidential election year (yup, pinch your nose and get ready for the circus to come through town again), PE has to put its dry powder to work, so there’s always hope. Here’s what industry professionals have to say:

John Stewart, Founding & Managing Partner of MiddleGround Capital: I’m expecting an economic slowdown extending into Q1 of 2025 due to a multitude of factors, from elevated inflation and high-interest rates to rising consumer debt and lower government spending. Consumer spending has held throughout 2023, but I expect it to contract slightly in early 2024 before tightening ahead of the Presidential election in November. Government spending from the Infrastructure Bill has been slow to materialize and make its way into the economy. In fact, the material impact of the 2021 Infrastructure Investment and Jobs Act is not projected to have any meaningful funding into the actual economy until 2026.

Combined with increased interest rates, which I expect to ease in 2024, but remain higher than the average rates over the last 15 years. Many of the leading economic indicators are projecting a more optimistic view – softness in the initial months of 2024 with improvement arriving in late Q2 into the second half of the year. I don’t agree with these projections and think that the toll from rising interest rates is going to put the U.S. economy into a recession with rising inflation inevitable.

David Duke, Partner, Business Development, Kian Capital Partners: Significant softening continues as credit cost weighs on consumers and businesses. Unsure if we’ll experience a full-blown recession but given the economic and geopolitical headwinds, it’s more than 50 percent likely.

Kelly DePonte, Managing Director, Probitas Partners: I’m still worried about a potential recession in 2024. Inflation and the resultant higher interest rates have not been tamed, and a significant amount of debt outstanding at lower rates will need to be refinanced in 2024. There are also a number of global economic and geopolitical risks that can have a knock-on effect on the U.S. economy. I believe there is more potential downside risk than upside opportunity, but the situation is uncertain.

Joseph Weissglass, Managing Director, Configure Partners: A stabilization and then gradual reduction in interest rates begin to spur more economic activity and the U.S. avoids a full-scale recession. Consumer discretionary spending remains muted through 2024, however, driving weakness in consumer-exposed sectors.

Jaime Forsyth, Partner, Head of Investment Team, Monomoy Capital Partners: Demand/consumption and labor tightness are the top two macro concerns that could impact Monomoy’s industrial and consumer-facing portfolio next year. Covid-19 pushed us to streamline our cost structures and drive our companies to be more efficient than ever before. For the past year and as we continue into 2024, the challenge is now bringing demand back to a level where we can really enjoy the operating leverage that we worked so hard to create. In addition, the labor market has remained tight for a couple of years, and if unemployment remains relatively low (<5%), that labor tightness may continue.

James Andersen, Founder and Managing Partner, Clearview Capital: The geopolitical situation is unstable and there is a reasonable likelihood that a flash point somewhere will ignite and wreak havoc. While geopolitical risk is in the background at the forefront is the unsustainable fiscal policy of the Federal government. Interest rates are likely to remain high, which will cause Federal interest expenses to rise rapidly even as the Federal debt continues to grow due to massive Federal deficits driven by out-of-control spending. There seems to be no ability of politicians to address this issue short of a fiscal crisis which is now inevitable. We need to be prepared for higher rates for longer even if the Fed decides to cut rates because the supply of U.S. government debt needed to finance enormous deficits and the refinancing of existing debt will far outstrip the supply of investors willing to provide that capital.

Rashmi Singh, Managing Director, Supply Chain & Commercial Services, William Blair: Geopolitics and potential for an energy crisis is a big concern for the global economy. While the global economy was relatively stable despite Russia-Ukraine conflict, the Israel-Palestine and ongoing U.S.-China conflicts threaten to impact the economy, and particularly energy economy significantly.

Frank Mountcastle, Head of M&A, Harris Williams: Supply chain disruptions related to Covid-19 have had lasting impacts on many sectors. Companies of all types are studying their supply chains with an eye to simplify and shorten them, resulting in more manufacturing closer to home as well as investments in supply chain technology and consulting. Our Transportation & Logistics Group is also seeing greater uptake of 3PL services (3rd party logistic companies) as more shippers see the value these logistics specialists can provide.

In healthcare, there is a powerful convergence happening with retail and other consumer-facing sectors. Healthcare providers are eager to differentiate themselves by offering better customer experiences, and they’re looking to apply proven best practices in customer acquisition and retention, which creates exciting new opportunities for investors with expertise in those areas.

Sustainability is another important theme, driving investment in businesses involved with the circular economy, renewable fuels, and environmental services. Likewise, growing consumer demand for clean and healthy products—from beauty to food—is driving innovation and growth in a wide range of subsectors.

Consumers are also increasingly apt to outsource key services, especially those related to their homes, and they demand more modern customer experiences. This creates significant opportunity for businesses that can provide home services paired with the ease and transparency consumers have come to expect from other daily transactions.

All of these trends tend to favor private equity-backed platforms.

David Golub, President, Golub Capital: Private credit continues to take some market share from the broadly syndicated loan market, with direct lenders now able to provide solutions in the billions. But don’t expect the BSL market to disappear. I predict the BSL market will make a comeback in 2024.

Stewart: There are a lot of financial sponsors that have portfolio companies in aging funds that are going to have to look to monetize those funds in the near term. In an environment where liquidity is tight, I expect to see an increase in continuation vehicle use for well-performing assets as a method for providing liquidity to earlier investors and providing visibility into solid return opportunities with fresh capital.

Duke: We see dealflow busy the first half of the year, but closing deals will prove difficult as credit tightens, valuation gaps between buyers and sellers remain and performance is volatile.

Weissglass: As the rate environment stabilizes in early 2024 and a rate reduction cycle begins in late 2024, I expect M&A volume to increase significantly. Across both sponsors and non-sponsored businesses, pent up demand for exits leads to a significantly higher level of M&A activity in 2024, allowing private equity and private credit to deploy dry powder.

Singh: Dealflow in 2024 should improve from 2023 levels. M&A sentiment in 2023 was muted due to rising and uncertain interest rate environment and consequent mismatch between buyer and seller valuation expectations. Rates seem to have peaked and economic indicators like PMI are back in the expansionary zone. With that somewhat stable backdrop, there will likely be more activity overall in 2024 as sponsors look to lock in returns for their prized assets and also deploy newly raised capital that has been sitting on the sidelines for an extended period of time.

DePonte: Fundraising in 2023 has been split. As far as dollars committed, large funds have dominated, not just because they are large but because historically, they have raised a large number of funds and have a large number of legacy relationships. First-time funds with a limited number of LP relationships are having more difficulty, and both these trends are likely to be evident in 2024.

Andersen: Fundraising will likely continue to be lower than the peak years because fixed income options will look pretty attractive in a high interest rate environment.

Weissglass: Residential services continues to be a top area of focus for private equity through 2024 — not just the typical HVAC and plumbing businesses, but also pest control, lawn maintenance, septic, etc. In addition, building products / services rebound significantly as prospects of a full-blown recession lessen and the pressures of under-supply take over.

Josh Benn, Head of M&A, Kroll Duff & Phelps: Consumer, healthcare, technology. All three sectors had a very soft 2022 and with rates having peaked and likely will be reduced next year, investors will have more confidence in venturing further out on the risk spectrum into higher growth segments, discretionary categories and those with regulatory dynamics. The restaurant sector will continue to evolve. Traffic and labor remain the sector’s top concerns. Technology will serve to drive efficiencies and enhance profits to partially offset sales declines and margin pressures. Off-premise demand continues to shrink for many concepts although has sustained for others where product travels well. It will remain a bifurcated market. There will be winners and losers and the former will drive both organic and new location growth, losers will contract, and many will need to be restructured or sold to larger strategic platforms to take advantage of scale and synergy opportunities.

Michael Ellis, Partner, Proskauer: While not immune to broader economic headwinds, I expect to see continued investment and consolidation in the healthcare sector. With an aging population and continued technological advancement in the space, I believe the healthcare sector will outpace the broader M&A market. Adjacent to healthcare, another sector to watch in 2024 is health and wellness. With the proliferation over the last few years of mental health awareness, obesity drugs and the like, it will be interesting to see how these advancements ripple through the broader market.

Benn: AI is driving optimized hospitality marketing initiatives, consumer engagement strategies, data capture and trend analytics. Larger organizations are using these tools effectively. These capabilities will actually contribute to M&A activity as smaller brands will look to partner with larger strategics who can provide access to more sophisticated tools and remain competitive.

Ellis: It is clear that we have only begun to scratch the surface in terms of the potential significance of AI to the legal market generally and the M&A space in particular. I believe we will continue to see advancements at a rapid pace that will ultimately lead to more efficient deal processes for dealmakers and clients alike. One thing we can say for sure is that the possibilities are endless.

Singh: AI has and will continue to open up the information economy and the availability of data. Data democracy is the next open source movement and it will have a significant impact on all professional services industries including investment banking.