What will private investors do in 2024?

That is the picture that emerges from the M&A Trend Research by the Dutch M&A Community and Ansarada for 2024.

In summary
• Uncommitted capital at private equity houses is an important driver of deal growth next year.

• Dealmakers mainly expect that buy & build strategies will lead to a high transaction volume in 2024.

• Many dealmakers are gloomy about venture capital investments. Many expect this to decrease (over 42%), or at best it will remain the same (34%)

The previous edition of this M&A survey showed a moderately positive mood towards private equity (PE): more than a third of respondents expected an increase in the number of PE deals. This year respondents are even more positive. Now more than half (more than 51%) expect such an increase.

Rob van Veldhuizen (Global Head Corporate Finance at ING) and Marco Gulpers (Head of Corporate Finance M&A at ING Netherlands) see the presence of quite a bit of ‘dry powder’ (uncommitted capital) at private equity houses as a driver of deal growth next year . “It is becoming more difficult to get buyers and sellers together, as after a boom in valuations, they have now collapsed slightly – and sellers may still want the ‘old’ prices for their companies.”

Private equity is letting the money flow again

In the words of Jan-Hendrik Horsmeier, partner at law firm Clifford Chance: “We expect private equity to invest heavily again in the coming year. The most important private equity players have been very successful in attracting capital in the past period, which means that the focus in the near future will be on deploying that capital, with a particular focus on the (renewable) energy sector, tech and financial services.”

Aron de Jong, Deals & Financing Partner at Mazars, also thinks this way: “Money has been cheap in recent years and private equity parties have done successful fundraising. They are tasked with putting that money to work at a good return, so that means there is a lot of demand on that side. At the same time, the supply is relatively low, which ensures that the price remains at a reasonable level. In that respect, it is still a good time for owners to sell. The chances for a pre-exit are good.”

In short: private equity will make the money flow, thinks a (small) majority of dealmakers. “All those funds have to do something,” as Katinka Middelkoop, partner at law firm Allen & Overy, summarizes succinctly.

The mid-market with deals under 200 million euros seems particularly promising; there, private equity will probably escape the downturn at the top of the market, expects Bas Mees, partner at law firm Rutgers & Posch. “Large deals face financing challenges. Rising interest rates and banks’ reluctance to provide financing make it more difficult to realize these transactions. Moreover, macroeconomic uncertainties play a greater role in decision-making for large deals. Acquiring a multinational company often comes with greater exposure to geopolitical risks compared to purchasing a smaller-scale regional business, such as a healthcare practice or an IT company. The mid-market is less affected by this.”

Buy and build as key driver

The PE strategy of buy and build and add-ons will remain as popular in 2024, according to several dealmakers we spoke to for the study. In fact, there is growing interest from private equity investors to hunt for bargains as valuations of target companies decline or become more realistic. This allows buyers to make more attractive deals within this market segment.

The biggest focus for private equity firms from most important to less important:
01. Add-on acquisitions (buy & build)
02. Absorb the effects of lower economic growth and higher costs
03. Improve profitability of portfolio companies by investing in quality and value creation
04. Finding new targets
05. Managing exits and divestments
06. Raising capital for new funds

A large group of respondents (almost 30%) confirm that the emphasis is on ‘buy and build’ and ‘add-ons’. This also applies to Ewald van Hamersveld (KPMG partner, who heads Private Equity within the firm’s Transaction Services): “For PE, buy and build is the holy grail. You buy a smaller company, where there is no need to take entire management teams with you, you can buy larger and therefore cheaper (synergies). With a buy and build strategy, good companies always become more valuable. With an emphasis on ‘good’, because you should stay away from companies that are not performing.”

Almost a quarter of dealmakers (25%) underline the latter: especially in times of lower economic growth and higher costs, PE is selective in its investment policy. The money is flowing, but there is more attention to where it goes than was sometimes the case in the past, says Age Lindenbergh, Managing Director and Co-Head of the Benelux practice of consultancy firm Alvarez & Marsal: “You see in the market that there is more attention to quality. In the past, there was also interest in companies that were doing well, but did not perform particularly well. Now buyers have clearly become more selective. The options for financing with debt are more limited these days. And of course you don’t want to have to deal with banks if things go wrong.”

Lean times for venture capital

As hopeful as respondents are about the prospects for private equity investments, they are gloomy about investments by venture capital (VC) companies. Many dealmakers expect these to decrease (over 42%), or at best they will remain the same (just under 34%).

The problem is not so much that there is no money, but rather that investors have cold feet. As Michelle van Huijstee, Private Equity Leader at accounting and advisory firm Deloitte, says: “Early-stage tech companies in particular, which rely heavily on VC investments, may find that financing becomes more limited as uncertainty in venture capital increases. Macroeconomic prospects and interest rate increases are putting pressure on valuations, which in turn has an impact on access to funding. This is therefore not due to the funding capacity, but to the mismatch between the perception of startups about their own valuation and growth trajectory versus the view of venture capital firms on these same valuations.”

“Those valuations have taken a hit”, agrees Ida Kuijken, partner at private equity investor Fortino Capital. “Investors are now more concerned with the ‘path to profitability’ and therefore investments are being looked at more critically.”

In other words: “Investors are fed up with negative cash flows and venture capital is unfortunately experiencing the consequences,” in the words of Lesley van Zutphen, Managing Partner of investor Bencis Capital Partners. Young companies in particular will notice this, thinks Bas Mees, partner at law firm Rutgers & Posch. “To the extent that investments are made, it is often in financing rounds with smaller ticket sizes in which several investors act together to spread risks.”

Great deals coming up

Yet there is also some optimism here and there. Just under a quarter of respondents (23%) expect an increase in VC investments, albeit with some ifs and buts. Gaby Smeenk, partner in the M&A and Capital Markets section of law firm De Brauw Blackstone Westbroek, puts it as follows: “I expect cautious growth, but large financing rounds will probably be avoided.”

Unlike in the past: “Back then there was a lot of ‘dry powder’ at VC and a lot was bought, regardless of business plans or cash generation. Now we see that investors are making stricter demands – that a company is cash positive and shows growth. In any case, there must be a clear route to profitability”, says Mark Stoelinga, Associate Director at Clearwater International. At the same time, Stoelinga sees new investment categories such as AI and machine learning emerging rapidly. “So fast that we will certainly continue to see VC activity.”

Some dealmakers even expect a clear revival: “It’s on the back burner for a while, but there are so many interesting things happening in the tech world that great deals are undoubtedly coming again”, says Ytzen Marseille, Partner at JB Law. This is recognized by Bas Glas, senior partner at investor Gilde. “VC investments are expected to increase, especially due to increasing interest and activity around Renewable Energy, AI and ESG.”

Read also: Dealmakers expect an increase in deal volume in 2024