DealLawyers.com Blog

January 31, 2023

Private Equity: Sponsors Have Mixed Expectations for Middle-Market Deals

Katten’s recent “2023 Middle Market Private Equity Report” provides plenty of insights into how PE firms view the challenges and opportunities middle-market deals will face this year. Here’s an excerpt from the intro:

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.

The report also addresses dealmakers’ assessment of M&A opportunities in various industry sectors and notes how deal practices, such as due diligence and financing structures, are evolving to address current market conditions.

John Jenkins