M&A Quarterly Review—4th Quarter 2022

Middle market M&A activity decelerated in Q3 2022

  • Deal volume declined 11% YoY to 13,619 during the TTM period ended September 2022
  • Total deal value shrank by 14.6% to $349.5 billion during the same period
  • Valuation multiples spiked to 8.1x TTM adjusted EBITDA in Q3 2022, a 20-year high

Macroeconomic headwinds slowed capital formation

  • Leveraged loan issuance in the U.S. fell to $67.2 billion in Q3 2022, the lowest level since the fourth quarter of 2014
  • The median cash ratio of investment grade companies declined to 18.8% in Q2 2022
  • Dry powder held by global buyout firms shrank to $810 billion in November 2022

Economic indicators were mixed

  • Real GDP expanded at an annual rate of 3.2% in Q3 2022, following two consecutive quarters of contraction
  • The LEI for the U.S. decreased by 1.0% to 113.5 in November, continuing a nine month trend
  • The Conference Board Consumer Confidence Index® improved in December to 108.3, after back-to-back declines

M&A activity is likely to stabilize and increase in 2023

  • Valuations will likely pull back from all time highs, and volume will likely trend up toward pre-2021 levels
  • Financial buyers will likely be more active as strategic buyers focus on the economy and geopolitical risks
  • Digital transformation, supply chain stabilization, and synergies will likely motivate buyers

Risks to our view

  • The economy falls into a deep, wide or U-shaped recession
  • As the market adjusts to the rising cost of capital, the valuation expectations gap between buyers and sellers widens
  • Volatile input availability and prices create material operational issues for target companies