A brief retrospect on 2023 and a forecast for 2024

We asked our Partners from different geographies to give us a summary of their business in 2023, challenges they faced as well as a preview of what to expect in 2024. Here are their thoughts:

Kaine Smith, Rickitt Mitchell – United Kingdom

UK transaction volumes were around 35% down YOY in 2023, driven by interest rate volatility, the global economic slowdown and a fundamental mismatch between buyer and vendor pricing expectations. The lower-mid market however has continued to prove relatively well insulated to macro-economic trends, with the majority of deal activity driven by the desire for shareholders to exit or an underlying strategic impetus for inorganic growth. Deal timelines have however elongated, and buyer scrutiny unquestionably increased. 2023 has been a year of consolidation for Rickitt Mitchell with successful cross-border transactions completed in the USA, Netherlands and Sweden.

We anticipate UK deal volumes will recover from 2023, although this may only become fully apparent as we enter the second half of the year. The stabilisation of interest rates will assist private equity step back into the market and their return is likely to drive additional competitive tension in processes. Investor dry powder remains abundant and the impetus for this to be deployed is ever-increasing. Rickitt Mitchell have a strong pipeline going into the year and we feel bullish on likely performance.

David Wallace, Armillary – New Zealand

David WallaceReflecting on the themes of 2023, phrases like “that was a battle” come to mind for us in NZ. While not as dire economically as commentators predicted at the end of 2022, the numerous disruptions ranging from significant weather events, elections, global conflicts, World Cups, and interest rate hikes, among other factors made it challenging to find positive threads.

In December we published our annual Return on Capital Employed report. The median ROCE performance across all companies has decreased to 8.4% from 9.6% in the previous financial year, which is below common estimates for the post-tax market average weighted cost of capital (“WACC”) of 9%.

It’s fair to say the first half of 2024 year is looking very busy for us having secured a number of large and medium-sized M&A and capital-raising engagements towards the end of 2023. We also have a strong pipeline. Internally we are thinking about:
•The importance of scale or differentiation for businesses to be robust enough to be able to withstand headwinds in the marketplace; and
•The question of where the buyers will come from for some of our larger family-owned businesses that are looking for opportunities to create liquidity and succession management and to position their business appropriately for that process.
We think the latter is really going to drive the private capital markets for the next few years. Private direct investment and private debt are on the rise as investors become more sophisticated and looking for alternatives to listed equities and private equity funds.

Current forward interest rate indicators suggest that interest rates have peaked and are expected to ease in the later half. We expect that business valuation and corresponding multiples to begin to increase.

Christoph Katz, Active M&A – Germany

Principle takeaways of 2023 in terms of your business and geography.
•Personal – a good year with successful project completions
•Business – many people, buyers and sellers alike, were active in the market, but less real and concrete things have come out of it on average
•Geography – international, cross-border connections continue to play an important role; ongoing conflicts (both military and trade) had an influence on attraction (proximity or perceived connection/link to one of the conflicts assigned the category “difficult or risky” to a potential market or deal and thus reduced interest considerably both from a target location perspective and even from an end-market exposure of targets; as a mirror image to that, a “closer to home” mentality was more prevalent than usual in my view

•Multiples/valuation – expectations from successful years and seller markets still drive seller valuation expectations up while the market has turned itself more into a buyers’ market with lower valuation expectations, higher risk avoidance and deductions plus more scrutiny from buyers and financing bank side
•Geography – I expect the abovementioned “closer to home” mentality to continue given continued political and economic uncertainty as well as election cycles in many important markets like the EU and the US that typically let businesses wait for the outcome
•Business – the impact of uncertainty on business sentiment will likely continue with higher risk awareness and consideration, which on the other hand is the time for the brave and courageous, and those with clear strategies to execute.

Marija Leitoniene, Confidentus – Lithuania

Since 2020, each year brought new challenges, which highly affected the business environment. Everything started with COVID-19, followed by lockdowns, broken supply chains, war in Ukraine, sudden and huge demand for everything, and skyrocketing inflation, which led to the new reality. It greeted everyone with spiking interest rates, full warehouses of stock, decreased demand, and correction of prices. 2023 was a busy year for us with solid and well-performing clients, but also with a lack of trust from international and local buyers regarding future sales and profitability, which influenced a willingness to postpone transactions and it became harder to agree on valuations.

We see 2024 as a transition year for businesses to stabilize, as changes in prices and margins have still not been normalized fully through all supply chain participants. However, demand and growth should start recovering as everything is getting back to its place. We expect to see similar or a little bit lower multiples as in 2023 but with a bigger portion of deferred payments linked to forecasts. It should increase the chances of agreeing on the price, help finance the transactions, and increase the number of closed transactions.

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