The business landscape is continuously adapting to market dynamics, becoming more nuanced and fluid. Last year’s key observation suggests a resurgence in deal activity for 2024. The growth in business deals is expected amid more predictable financial markets. However, larger deals are more likely to transition to private credit or opt for full equity funding to parallel the stability of buyout offers provided by strategic bidders.
The anticipated resurgence carries a caveat: leverage and valuation levels are expected to stay lower than in 2021. Additionally, the credit markets might witness ongoing interest, covenant, and other relief amendments. Some borrowers and sponsors might even resort to refinancing in situations where existing lender groups have strained relationships.
While some may be hoping for a surge in initial public offerings (IPOs) due to the reopening of public markets, the certainty of deployable “dry powder” remaining at record-high levels suggests that this might be a bit further down the road.
According to Bloomberg, a key characteristic of 2023 was cautiousness due to the unpredictable market conditions. This cautiousness prompted due diligence, prudent risk-adjustment structuring, and hesitations around valuations. As the year progressed, however, there was a significant improvement in transactional activities.
Looking ahead, 2024 is predicted to show a continued rebound in deal activity. Many investors are expected to focus on building pipelines and targeting their strategy’s right risk profile. The market is also projected to benefit from historical information on interest rates and earnings, resulting in a more stable environment for determining valuation and possibly leading to a steadier or even improved interest rate setting.
Notwithstanding the current macroeconomic setting, the upsurge in market confidence compounded with the sustained and burgeoning allocation of significant capital from private credit will likely propel healthy activity levels during the first half of 2024. There might also be a substantial gap to be filled by junior capital, as refinancings will necessitate a high degree of leverage relative to the current senior secured risk tolerance.
IPOs are expected to pose a challenge versus trade and private equity exits, considering the significant quantity of available private capital and the uncertainty around underwriting, despite the fact that some lawmakers are relaxing the rules around public market admissions. This is reflective of how markets have gravitated towards private credit instead of broadly syndicated debt markets, in spite of the capital cost and additional flexibility that the latter have been renowned for offering.
Moving forward, private credit is set to uphold its supremacy in the leveraged space and beyond. Even amid reports of a more extensive, slower fundraising environment, credit funds continue to break records, setting unprecedented records three times in the last 18 months. The dominant status of credit funds further solidifies with junior capital expected to play a growing role in financing markets.
To conclude, 2024 appears to promise fewer unknowns. The unpredictability of the past three years – with global pandemics, conflicts, and recessionary and interest rate dynamics – makes the extensive database and predictability of current times a robust platform for a resurgence to higher activity levels.