A round-up of conversations with bankers and PE firms suggest deals are slowing down if not dramatically coming to a halt due to the rocky macro environment.
One FSG banker said a lot of private equity firms have told him they’re avoiding deals for now because of the bear market and interest rate hikes. A managing director at an infrastructure fund told Mergers & Acquisitions that his firm is still active, though deal flow is slower than it was before the Covid-19 pandemic.
The infrastructure fund exec said dealmaking is “less robust, less fun and less buyer-friendly than pre-pandemic” but there’s a handful of “deals good enough to be actionable.
“Buyers are hovering over good deals despite exogenous variables affecting math and the ability to get deals done,” he said.
Valuation expectations have tended to remain high, even if public markets have declined 30 percent, several sources told us.
“Whether it’s a function of last year’s IPOs, SPAC or private equity deals, a company’s prospects for growth are dictating multiples, even though markets are down,” he said. “If a SPAC is down to $5 from $30, buyers in private markets might still offer $30.”
In some cases, he said, buyers may decide to wait for prices to drop. “We wait with some. With some, we can’t. Some businesses are so good, we’re not asking them to lower their prices.”
If the country falls into a recession, bargains will come to the fore, he believes. “Right now, there are no screaming bargains. In a recession, there will be bargains through desperation or normal, organic circumstances for growth. It will be a very attractive environment for private equity funds with dry powder.”
On a broader level, the senior banker at a mid-tier bank said interest rate hikes have “shut down” a good portion of middle-market dealmaking activity in these sectors.
“Returns are tougher to get,” he said. “There’s still a lot of dry powder, a lot of firms, a lot of deals. But getting debt is more expensive, and in general there’s a lack of confidence in the market. Parties lose courage, and they don’t like pulling the trigger.”