2023 Katten Middle-Market Private Equity Report – M&A/Private Equity

Dealmakers Diverge on PE Outlook Amid Market Uncertainty

Middle-market private equity (PE) firms have mixed expectations
for the U.S. mergers and acquisitions (M&A) market in 2023,
citing high inflation and concern that interest rates will keep
climbing-but dealmakers are maintaining cautious optimism in key
sectors. Though many investors expect to make additional
acquisitions, some are bracing for a challenging regulatory
environment, while others are prioritizing alternative deal types
to mitigate impacts from macroeconomic volatility.

That split outlook is reflected in this report, which is based
on a survey of 100 U.S. middle-market PE dealmakers engaged in a
diverse array of industries, including financial services,
education, health care, insurance, manufacturing and industrial,
media and entertainment, real estate and technology. Nearly
three-quarters of investors expect deal activity in 2023 to either
remain at the same level as last year or increase (40 percent and
33 percent, respectively), while over a quarter (26 percent) expect
a slowdown.

The amount of dry powder that PE firms have on hand could be
driving this disconnect-especially as an overheated economy,
domestic policymaking and geopolitical tensions come to a boil.
With debt markets tightening and financing harder to procure,
liquidity has become crucial to snapping up deals. Though some
dealmakers have struggled, others have taken advantage of lower valuations to expand on investments in
technology and finance. With the darkening clouds of a
potential recession on the horizon-and a clearer picture of what a
post-COVID-19 economy will look like-it should come as no surprise
that while the majority of market players don’t anticipate a
deal slowdown in 2023, they are not overwhelmingly bullish
either.

When it comes to individual sectors, some dealmakers remain
optimistic despite recent media reports of tech and financial sector layoffs, falling stock prices
and signs of slowdowns in key industries. More than half of PE
firms (58 percent) are investing in financial services, the leading
sector, followed by real estate at 48 percent and technology at 43
percent. Further, respondents see ample opportunity in technology
and finance, with dealmakers seeing the potential to leverage
falling valuations in the tech industry as well as transformational
opportunities in the finance sector in the coming months.

Those factors have spurred a series of swift and varied
strategies from investors, many of whom have pivoted toward
all-equity backstopped deals to gain an upper hand in the bidding
process. This deal structure requires that private equity firms
agree to fund the full purchase price of a company upfront if they
are unable to get debt financing in place prior to the closing
date. All-equity deals are viewed by some as particularly
aggressive in today’s debt-constricted market; however, they
ranked as the most important element in successful deal creation in
2023, and a majority of respondents anticipate an uptick in
all-equity transactions moving forward.

Whether the current political and economic turbulence will
dampen M&A or spur additional activity, it’s clear that
2023 presents a wide range of opportunities for dealmakers – even
if that means adopting new acquisition strategies to adapt, and
thrive, in the face of global market disruption.

M&A Market Remains Buoyant in the Face of Economic
Uncertainty and Rate Hikes

WHAT IS YOUR FIRM’S CURRENT STATUS WHEN IT COMES TO
THE DEALS IN THE FOLLOWING INDUSTRIES?

HOW DO YOU SEE THE OUTLOOK FOR M&A OVER THE NEXT 12
MONTHS?

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