Access to debt finance should ease and aid dealmaking in 2024, Karsten Langer, managing partner of Riverside Europe, told PE Hub Europe in the latest of our Q&A series with senior dealmakers.
While financing was constrained in 2023, “there are now signs that rates are unlikely to increase further and therefore locking in loans at the current level becomes more attractive”.
Most of the private equity firm’s business in Europe in 2023 came in the first half, including cleanroom garment and consumables distributor Dastex Reinraumzubehör and Gastromatic, a SaaS provider of workforce management software products for small- and medium-sized businesses in shift-based industries.
Do you expect a pickup in dealmaking in 2024 compared to this year? What’s making you optimistic about dealmaking next year and what are you worrying about?
We do expect a pickup in dealmaking in 2024. 2023 saw deal numbers decline significantly, especially at the larger end of the market, but I expect that buyers, sellers and lenders will eventually start to find each other again in 2024.
During the second half of 2023, seller expectations remained high, while on the other side buyers seem to believe that prices should be dropping, so we have a situation where the two don’t meet as often as you would expect. However, we are now starting to see that gap in buyer and seller expectations closing, with on the one hand sellers realising that peak valuations are no longer realistic and, on the other, buyers realising that the future is not as bleak as they may have expected.
Debt finance has also been more constrained in 2023, but there are now signs that rates are unlikely to increase further and therefore locking in loans at the current level becomes more attractive. And in any case, we have found that where a sponsor has strong, long-term relationships with lenders, it is still able to get deals done.
How was your dealmaking experience in 2023? What were the high and low points, in terms of deals/exits signed and in terms of wider conditions?
While private equity more broadly experienced a decline in activity, at the lower end of the mid-market where we operate, activity was sustained. Over the past 12 months, we’ve completed one exit, three platform acquisitions and four add-on acquisitions in Europe. All three of our new platforms are emblematic of the kind of company we are looking for: founder-owned, with a strong position in an attractive market, where there is clear growth potential that we can help facilitate and which falls within one of our four sector verticals.
So we’ve had a strong year, but it’s worth noting that all of those deals were signed in the first half of the year, and the market deteriorated after the summer.
However, we feel somewhat insulated from the slowdown in the M&A market. Most of our investments are of smaller, founder-led companies, where we are the first institutional owner. In an economy that is more uncertain, founder-owners can be more interested in finding a partner than businesses with institutional owners, where processes can be put on hold relatively easily if the timing isn’t right.
When founders are selling, it’s often not just about maximising the valuation; it’s about leaving the company in the right hands and having a strong partner to help grow the company to the next level.
Which sectors and/or sub-sectors do you expect to do well in 2024 and why? Which do you expect to struggle?
The beauty of the lower mid-market is that I believe you can always find pockets of growth, even when the overall economy is sluggish or even flirting with recession, as seems to be the case at the moment. The platform investments that we made this year and last are great examples. In the last 18 months we have bought companies in diverse sectors like food, software, data and analytics and healthcare, and each one of them is growing its top line by double digits.
We believe the key is to find companies that either benefit from a macro-trend or market shift, or disrupt an existing way of doing things with a new and better solution. An example of the former is Dastex, acquired in May 2023, which provides supplies to the clean-room manufacturing industry. Europe is currently going through a ‘re-shoring’ or ‘near-shoring’ of strategic manufacturing industries such as pharma and semi-conductors, reducing reliance on supplies from China or India, building up domestic capacity instead, and this is creating strong demand for the related consumables which Dastex provides.
An example of the latter is Gastromatic, a software company providing shift scheduling solutions to the hospitality sector, displacing traditional spreadsheet or even whiteboard solutions.
And of course, it’s also about finding and supporting excellent management teams, regardless of the sector. With a great idea and a great team, smaller companies can outpace the growth of their overall market.
What’s your outlook for exits in 2024? Do you expect a pickup in IPOs or will it be mainly financial and strategic sales next year?
Over the past couple of years, we have moved from what was probably the best seller’s market in memory to a moderate buyer’s market. While there is likely to be some regression towards the mean in 2024, we don’t expect a sudden swing back.
Although public stock markets have done surprisingly well in 2023, the IPO market is likely to remain soft in 2024, but we expect strategics and private equity buyers to come back to the market. Private equity needs liquidity, so eventually the pent-up demand for transactions will become greater than firms’ need to achieve a specific price for an asset.
Editor’s note: PE Hub Europe will be running 2024 outlook Q&As with senior private equity dealmakers through December and into January. The previous instalment was with Dany Rammal, managing director and head of Europe at PSG.