Next year should usher in an even stronger M&A market across the U.S. than in 2017, with more deals occurring in the middle market and involving privately-owned companies.
That’s according to findings from Chicago-based law firm Dykema in its annual M&A survey and outlook, which found a higher percentage of responding CEOs, CFOs and advisers expecting the market to strengthen in 2018.
In the survey, 38.5 percent of respondents expect a stronger market in the next 12 months, the best results in the last four years. That compares with 33 percent of respondents a year ago who expected a stronger market for 2017.
Another 41.8 percent expect no significant change in the market in the coming year, versus 47 percent a year ago, as more respondents turned positive. Just 19.6 percent expect a weaker market.
Tom Vaughn, a partner at Dykema’s Detroit office and co-leader of the law firm’s M&A practice group, reads both of those responses as a sign for a “very positive” 2018 in terms of dealmaking activity.
“Although in deal volume we’re down a little bit in 2017 from the prior year, it still has been a very active year, and there still is a lot of activity out there,” Vaughn said. “The outlook for 2018 for the U.S. economy and the U.S. M&A market is strong. I don’t think people see the window closing.”
Expectations are a little better among Michigan respondents to the Dykema survey, with 39.5 percent anticipating a stronger market and 47.3 percent seeing no significant change in 2018.
The M&A market has been fueled by the availability of capital, which more than half of respondents rated as most responsible for activity; U.S. economic conditions; and interest rates that remain favorable, despite recent increases.
The findings of the Dykema survey align with what Matt Miller, managing director of BlueWater Partners LLC, a Grand Rapids-based M&A firm, has been seeing in the market. The results match his expectations for next year.
“Our pipeline is relatively strong right now. The last few months we’ve been presenting more proposals and we’re expecting that to carry over into 2018,” Miller said. “In terms of confidence and growth and leading economic indicators, and the amount of capital, it’s all very supportive of transaction activity.”
BOOMERS WANT OUT
As the new year approaches, nearly eight in 10 respondents to the Dykema survey expect to see more activity involving privately-owned business, a good portion of which will result from aging business owners who want to sell.
More than four in 10 attributed an expected increase in deals for privately-owned companies to aging owners. A strong M&A market through 2018 should provide them plenty of opportunity to sell, Vaughn said.
Another one-quarter of survey respondents say they expect increased activity involving privately-owned companies because owners have “concerns about the window closing” on a strong market and don’t want to miss the opportunity to sell.
“At some point, some of this has got to have some kind of a decline,” Vaughn said. “If I’m an aging baby boomer that’s been thinking about selling, you’ve got a window here. There’s an opportunity still, but I don’t think anybody’s going to predict where we’re going to be a year from now.”
PRIVATE EQUITY HEATS UP
More privately-owned businesses coming to market will result in more transactions in the middle market, particularly as private equity buyers show higher interest.
Seven in 10 survey respondents expect to see more deals valued at less than $50 million and 52.5 percent expect more activity in the range of $50 million to $100 million. More than 63 percent predict a decrease in deals valued at more than $1 billion, according to Dykema, which has offices in Grand Rapids, Lansing, Detroit and Bloomfield Hills in Michigan.
Three-quarters of survey respondents from Michigan expect more deals valued less than $50 million and 52.5 percent see an increase in deals of $50 million to $100 million.
The national percentages are consistent with past survey results and reflect the growing number of private equity firms across the country and their increased willingness to invest in smaller transactions, Vaughn said.
Dykema’s report on the survey results noted a “heating up of the private equity markets with hundreds of millions of dollars pouring into new and existing private equity funds this year, and those funds seeking to deploy that capital.”
More private equity firms today focus on the middle market “than probably we’ve ever had,” driving up valuations and luring sellers into the market, Vaughn said.
“The PE firms have moved down market because there’s so much competition up at the higher level and probably less deal flow, and so they have gotten themselves comfortable moving down market because that’s really where they need to play,” he said. “That is encouraging baby boomers who are on the fence about selling or continuing to operate to put their companies on the market.”
A MATTER OF DIFFERENTIATION
At BlueWater Partners, nine out of 10 sellers the firm represents are now attracting some interest from prospective private equity buyers, Miller said. That compares with half of sellers five years ago, he said.
Miller attributes that heightened PE activity to “so much capital chasing a limited number of attractive investment opportunities, and a need to differentiate themselves.”
Across the nation, private equity investments grew to $187 billion in the third quarter, up more than 25 percent from the prior period, according to a quarterly report from the American Investment Council. Private equity firms in the U.S. had $608 billion in so-called “dry powder” to invest as of Sept. 30, up 6 percent from just three months earlier.