Arnaud Petit (Rothschild Corporate Finance): “I’m confident M&A will bounce back in 2024”

Despite a gloomy 2023 overall, it was not a bad year across the board for M&A, with some sectors doing better than others. Investors were generally reluctant to pull the trigger on bigger deals, but such hesitancy is not expected to last long into the new year. Leaders League takes a look back at the year in M&A in the company of Rothschild Corporate Finance president Arnaud Petit.

Posted mercredi, décembre 6 2023
Arnaud Petit (Rothschild Corporate Finance): “I’m confident M&A will bounce back in 2024”

Leaders League: How would you sum up the year in M&A 2023?
Arnaud Petit: Overall, the global M&A market had a very difficult year, marked by a pronounced decline in deal volume, by 15% to 30%, and deal value, which dipped 40% to 50%. The large-cap market was particularly subdued, with 50% less deals north of a billion euros closed than 2022.

From Rothschild’s perspective, we carried out 65 deals in 2023, against 60 the year before. That said, like the market, we had less transactions of over a billion euros and more of under a 100 million euros. That we were able to adjust to the reality of the market speaks to Rothchild’s experience acting in transactions with a broad spectrum of value. 

What was behind the reduced flow of M&A activity in 2023?
Rampant inflation and a sharp rise in interest rates severely impacted investor confidence, and had a significant bearing on the finances of a number of companies. As a consequence, many investment decisions were put on hold, which accounted for the reduced deal volume and deal value.

We can also say that 2023 was a year of readjustment, following the record highs of the past few years, a period during which the overexuberance of the market led to a certain amount of overinvestment. 

Which sectors did well in 2023?
Healthcare had another banner year. Increased industrialization and consolidation will continue to be necessary if companies want to remain in the vanguard of this sector. Healthcare M&A exists apart from economic issues, and whether it is a good year or not, you need to be making investments in this sector. 

Have you also been involved in tech and education deals?
Yes, a little like healthcare, education is insulated from market turbulence. When governments are committed to fighting unemployment through training and education, they put up the means necessary, which is reassuring. A student starting school will be there for four or five years of study, which provides visibility in terms value.

2023 was a year of readjustment, following the record highs of the past few years

As regards the tech sector, the days when investors were throwing money at startups which were not yet profitable are gone. However, the IT services and software segments did just fine in 2023, thanks notably to a high level of consolidation.

Then there is the growing influence of impact companies in green sectors, such as renewable energy. There are real opportunities for those investing in this market, with companies growing at a fast rate and attracting high valuations. On a related note, we have seen a number of deals collapse because a target company didn’t tick all the CSR boxes. 

From a purely financial perspective, did the depressed state of the market in 2023 stop any deals from going through?
It certainly did. Firstly, because the seller was unwilling to accept the lower offers coming from prospective buyers, who were themselves excercising caution. Then, as the economic climate was not good, during negotiations, the target company might post results showing decreased revenue, which can give a buyer cold feet. Lastly, the rising cost of bank financing reduced the margins of estimated returns to a level investors no longer found acceptable, resulting in deals being called off. 

Any particularities in the way investors conducted deals in 2023?
We saw an uptick in shareholder reinvestment deals in 2023. Many funds chose to reinvest in existing portfolio companies rather than embark on new deals, which sends the right signals to potential targets.

There were many more smaller-scale deals done in 2023 than in previous years. Potential investors were also highly sensitive to signs of uncertainty over the future potential of targets. Lastly, a considerable number of sponsorless deals were concluded, a majority of them via convertible bonds. Structuring a deal in this way allows for contractually defined rates of return. 

What does 2024 have in store?
I’m confident M&A will bounce back in 2024. We’ve seen record fundraising years in 2021 and 2022. After a cautious 2023, private equity investors are going to have to expend their dry powder in the market. Furthermore, LPs of funds are going to demand liquidity from GPs in order to be able to finance their next fundraising. To do so, funds will be selecting assets to sell off. And they will favor premium assets, because of the higher rates of liquidity on offer in a difficult market.

We also hope to have confirmation that interest rates and inflation have peaked. We expect normal service to resume in the mid to large cap private equity segments. Actually, we can already see renewed activity in the market in preparation for the sales to come in 2024.