M&A Dynamics in the Lower Middle Market Right Now

lower middle market key trends

Stepping into 2024, Lower Middle Market (LMM) M&A dynamics continue to evolve.  REAG is optimistic and anticipates strong M&A activity. With strategic acquirers continuing to seek growth opportunities and private equity firms eyeing add-on opportunities – coupled with ample investable capital – there’s a heightened demand for quality LMM companies. 

With 2021 and 2022 reaching historic deal volumes as a result of cheap – almost free – debt, it’s easy to mislabel 2023 as a “pullback” when narrowly looking at certain performance data. 

We anticipate management teams, previously preoccupied with rising inflation and higher interest rates, to pivot towards strategic initiatives like M&A and release pent-up demand.

Here’s a comprehensive overview of what to expect in the year ahead from the private capital advisory team at REAG.

  1. Supply and Demand:

The fundamental laws of supply and demand will continue to shape the landscape of LMM M&A in 2024. With a high demand for quality LMM companies driven by strategic acquirers and private equity firms, sellers will find themselves in a favorable position in what remains a sellers’ market.

  1. Influence of PE Dry Powder:

The significant amount of private equity (PE) dry powder still on the sidelines will play a pivotal role in driving market activity. This abundance of investable capital will fuel deal-making, contributing to the overall volume of transactions in the LMM segment.

  1. Stability in Interest Rates:

As interest rate hikes plateau, we anticipate a positive impact on M&A volume in 2024. This stability provides a conducive environment for deal-making, fostering confidence among investors and facilitating transactions.

  1. Concentration on Higher-Quality Assets:

In the pursuit of returns, investors will increasingly gravitate towards higher-quality assets in 2024. This trend is driven by various factors, including the challenging nature of achieving excess returns without specialization, the evolving efficiency of the market, and the heightened sophistication of both buyers and sellers.

  1. Creative Deal Structures:

The creativity of deal structures will be influenced by prevailing interest rates. As rates fluctuate, stakeholders will adapt their approach to structuring deals to optimize value and mitigate risks, underscoring the importance of flexibility and innovation in deal-making.

  1. Consistent Valuations:

Valuations in the LMM are expected to remain relatively consistent in 2024. Despite market fluctuations, factors such as the quality of assets and the strength of underlying businesses will continue to drive valuations, ensuring stability in pricing.

  1. Size Requirements for PE Platforms:

The trend toward pre-pandemic levels of size requirements for LMM private equity platforms will persist in 2024. Investors will prioritize scalability and operational efficiency, aligning with the long-term strategic objectives of their portfolios.

  1. Importance of PE Add-Ons:

Add-on acquisitions will remain a vital capital allocation strategy for PE firms operating in the LMM segment. These strategic acquisitions enable portfolio companies to expand their market reach, diversify revenue streams, and drive operational synergies, enhancing overall shareholder value.

  1. Impact of PE Exits:

While the postponement of PE exits may begin to materialize in the market towards the end of 2024, the full effect is more likely to be felt in 2025. This delay in exits reflects the strategic decisions of PE firms to maximize value and capitalize on market opportunities.

  1. Election Year Effect and Legislative Impacts:

Contrary to speculation, the “election year effect” is expected to be overblown once again in 2024. Instead, the focus will shift towards legislative developments, particularly the impact of the infrastructure spending bill enacted in November 2021, which will shape M&A strategy across various sectors.

  1. Resurgence of International and Public Company M&A:

2024 is poised to witness a resurgence of international M&A activity, driven by globalization and cross-border investment opportunities. Additionally, the public company M&A landscape is expected to experience renewed momentum, fueled by strategic initiatives and favorable market dynamics.

As we navigate the complexities of the LMM M&A landscape in 2024, stakeholders must remain agile, strategic, and well-informed to capitalize on emerging opportunities and mitigate potential risks. 

With insights from REAG, we look forward to a year of dynamic deal-making and value creation in the Lower Middle Market. As your M&A advisory team, REAG helps mature companies navigate complex transactions and ensure a smoother more successful M&A process.

For more insights and expert analysis on navigating the 2024 LMM M&A landscape, watch the full update from REAG or reach out to us directly.