Takeaways From the 2024 ACG DealMAX Conference

PitchBookData,Inc. JohnGabbertFounder,CEO NizarTarhuniVicePresident,InstitutionalResearchandEditorial DylanCox,CFAHeadofPrivateMarketsResearch InstitutionalResearchGroup Analysis TakeawaysFromthe2024ACGDealMAXConference ThestateofplayinPEmiddle-marketdealmaking PitchBookisaMorningstarcompanyprovidingthemostcomprehensive,mostaccurate,andhard-to-finddataforprofessionalsdoingbusinessintheprivatemarkets. Publishing JinnyChoi SeniorAnalyst,PrivateEquityjinny.choi@pitchbook.com Keytakeaways DesignedbyDrewSanders PublishedonMay13,2024 Contents Keytakeaways1 Conferenceoverview2 CurrentM&Alandscape2 Solvingtheexitdilemma3 AI’simpactonM&A4 Restructuringwave5 Addendum:SlidesfromPitchBook’s6 sponsoredpanel“HowtoSolvetheExitDilemma” •DealMAXconferenceattendeeswerecautiouslyoptimisticaboutareboundinPEdealmakingdespitealacklusterfirstquarterandasetbackintheFederalReserve’stimelineforloweringinterestrates.Underlyingthatoptimismwasrobustattendance,whichwasup6%fromtheprioryear.1 •Oneoftheconferencepanelistsaptlydescribedthecurrentdownturnas“theGreatExhaustion,”whichisnotthesameastheGreatRecessionof2007to2009andthegovernmentinterventionthataccompaniedit,butmoreakintothesupply-demandcontractionof2000to2002,whicheventuallyexhausteditself. •SolvingthePEexitdilemmaiscrucialtosparkingabroaderrecoveryinPEdealmaking.Assponsorsexplorewaystocreateliquidityinthefaceofanimpendingmaturitywall,continuationfundsofferasolutionasascalableofframpforPE-backedassets. •AIisexpectedtoimpactM&Ainlargelythreeareas:internaloperations,sourcinganddealmaking,andportfoliomanagement. 1:“MoreThan3,100Middle-MarketProfessionalsConvergeatACG’sDealMAX,”PRNewswire,ACG,May6,2024. 1 Conferenceoverview DealMAX(formerlyInterGrowth)isanannualdealmakingconferenceformiddle-marketM&AorganizedbytheAssociationforCorporateGrowth(ACG).ACGisanM&Adealmakingcommunitydedicatedtomiddle-marketgrowthandbringsprofessionalstogethertoprovideresourcestosuccessfullynavigatetheindustry landscape.Theconferenceattractedmorethan3,100M&Aprofessionals,including840PEprofessionals,780investmentbankers,and200strategicacquirersandoperatingpartners.2ArecordnumberofDealMAXattendeescametogetherinLasVegasfromApril29toMay1toshareideas,connectwithdealmakers,andengagewithM&Aserviceproviders.Theconferenceconsistedofvarioussessiontypes,suchasmain-stagepresentationsandpanels,paviliondiscussions,andproductdemos.Sessionscoveredmanytopics,includingdealmakinginachallengingenvironment,financingandexitingportfoliocompanies,andAI’simpactonM&Aprocesses.Thisanalystnotecoversthekeythemesandtakeawaysthatemergedfromtheconference. CurrentM&Alandscape Highinterestrateshavebeenasignificantdampenerondealmakingactivityinthepasttwoyears.Investorshaveyettofullyrecoverfromthefastesttighteningcycleinover40yearsasthehighercostofleverageandlowervaluationscontinuetodragdownM&Aactivity.Leverageratioshavecontractedmeaningfullyoverthepastyear,andcompleteddealssawhigherproportionsofequity.Butthesentimentthatinterestrateswilllargelystabilizethisyearwasechoedthroughouttheconference,alongwithcautiousoptimismforimprovedM&Aactivity.Manyspeakersandattendeessharedthattheywerebusypreppingfordealsandreadytobringtheircompaniestomarket.Before,alotofinvestorshadbeenonthesidelineswaitingoutthemarketvolatility,butmanynowconsiderthemarkettobeinasteadierstate.Althoughthebuyer-sellergappersists,panelistssaidsellersareincreasinglyadjustingtheirexpectationsforvaluationsandbecomingmoreaccustomedtoachallengedfinancingmarket. PanelistsspokeabouttheextendedduediligenceprocessasapainpointinM&A.Manyagreedthatduediligencehasbecomelongerandmoreintense.Thistrendissomewhatincontrastwiththewaveoftransactionsthatrushedinduring2021,indicatingthatthemarketisfindingabalancewiththerightpaceofdealmaking.Investorsaregoingdeeperwithduediligencetofindaninvestmentthesisearlyinadealopportunityanddevelopvaluecreationandexitstrategies.Lendersarealsoaskingtougherquestionsgiventhetightnessinliquidityandreduceddistributionsthroughexits.Itisalsotakinglongertoapproveloansorfigureoutthedifficultcapitalstructuresthatsomedealsmayrequire. Manypointedtothemiddlemarket’ssuccessinfundraisingtoexplainwhytheyexpectM&Aactivitytoimproveinthesecondhalfoftheyear.AccordingtoPitchBookdata,USPEmiddle-marketfundraising(definedbyPitchBookasbetween $100millionand$5billioninfundvalue)markeditssecond-bestyeareverin2023, 2:“MoreThan3,100Middle-MarketProfessionalsConvergeatACG’sDealMAX,”PRNewswire,ACG,May6,2024. withover$141.1billionraised.Throughthesecondquarterof2023,middle-marketPEfundsheldarecord$508.8billionindrypowder.AlthoughPEdealactivityremainedsluggishinthefirstquarterof2024,severalpanelistsstressedthatsponsorswillhavetodeploythemassiveamountofcapitaltheyhaveaccumulatedandthatdealactivityisboundtoincreasesoonerorlater. Solvingtheexitdilemma PEexitactivityhasplummetedtoadecadelow,andseveralsessionpanelistsspokeabouttheneedtoboostexitactivitytoincreaseliquiditytoLPs.PitchBook’sleadPEanalyst,TimClarke,moderatedapanelonhowtosolvetheexitdilemma,3which isparamounttosparkingabroaderrecoveryinP