Tony Balloon is not bullish on 2023. The Alston & Bird partner, who co-chairs the international law firm’s Global Services Committee, sees a lot of cash on the sidelines as M&A activity slows, but feels a rebound next year will be uneven.

“Older PE funds are trying to deploy capital,” says Balloon, “but newer funds are slow to call capital.”

Federal Reserve policy is inhibiting investment and that is not likely to end until the Fed halts its rate hikes, he believes.

“Right now, bad news is good news,” Balloon notes, as markets react positively to reduced job gains and slower growth. That will only change when the Fed declares the battle against inflation won. “Bad news will actually be bad news.”

That’s not likely to happen any time soon. “I’m not a believer in a soft landing,” says the lawyer, referring to the hope of some that a sharp rise in unemployment and a real recession can be avoided.

In the meantime, Balloon sees capital expenditures varying from industry to industry. Semiconductors, for instance, will slow down. Infrastructure, biotech, and anything that’s got a climate policy angle will see investment.

A recent report from S&P Global Market Intelligence backs this up as it tracks private equity and venture capital deals in energy efficiency. The research firm sees a total of $31.8 billion in 280 deals in the sector worldwide through mid-November, compared to $16.4 billion in all of 2021, as interest in ESG grows. (The 2022 figure includes the proposed acquisition of Toshiba by a domestic Japanese consortium with a deal value of $16.2 billion.)

The strong dollar is encouraging U.S. companies to develop businesses they have abroad or to pursue acquisitions in India and Southeast Asia, Balloon says. The S&P Global report on energy efficiency confirms this as well, tallying 62.4 percent of PE investment going into Asia-Pacific companies, compared to 30.8 percent in North America.

Europe, however, is experiencing too much disruption. In general, geopolitical and macroeconomic conditions are not favoring M&A in Europe and elsewhere.

“The market loves certainty,” says Balloon. “In today’s world, there are levels of increased risk and that brings discounts on valuations and longer times to close deals.”

As if these headwinds are not enough, regulations are becoming more challenging. “You have to respond to more queries,” says Balloon. “The use of the administrative state has grown and I don’t see that changing.”

While there has been some tempering in financial services regulation, the fintech sector remains very hot for dealmaking as investors look for alternatives to the highly regulated banking sector.

“Investors tend to shy away from what are viewed as troubled spaces,” Balloon says. “It’s less a stop sign than a flashing caution light.”

Caution might not be such a bad idea. “If 2023 is batten down the hatches,” this expert says, “2024 will be a good year.”

Darrell Delamaide