2024 poised for surge in M&A activity

Increasing pressure for capital distributions and a more normalised valuation environment looks set to bolster mergers and acquisitions (M&A) activity involving private equity assets in 2024. While 2023 was very much a buyers’ market in private equity, higher interest rates have prompted adjustments in valuations across various sectors in privately owned businesses.

This year, there is also more pressure on private equity investors who hold assets acquired during 2018 and 2019, before the onset of the COVID pandemic, to return capital to their investors. They can no longer simply hold on to mature investments that are ripe for exits.

As the anticipation of gradual interest rate cuts by the Reserve Bank of Australia (RBA) gain momentum, the pace of this adjustment is expected to be measured, given that current rates align with historical norms rather than excessive levels. These unfolding dynamics are poised to foster a more equitable landscape in M&A activity, creating an environment where willing sellers and interested buyers find a better balance. This trend is particularly pronounced in sectors such as technology, artificial Intelligence (AI), food retail, and healthcare. Foreseeing a surge in interest from private equity investors in the technology and AI realms, we also anticipate a broader trend of businesses leveraging technology to enhance operational efficiency and streamline their workforce.

Last year we saw some large online retail enablers using technology and innovation as a way to streamline their workforces which in some cases resulted in improved financial performance for those businesses. We are also focussed on which sectors will remain resilient to the adoption of AI, such as healthcare. Until we have a big technology breakthrough, it is hard to see how healthcare workers will be replaced by AI and technology, especially in niche professions such as surgery and dentistry. Therefore, healthcare businesses continue to present a strong investment opportunity, especially firms on the supply side of the healthcare workforce.

WAM Alternative Assets (ASX: WMA) participated in a co-investment with Crescent Capital in Healthcare Australia last year, which is Australia’s main supplier of nurses and healthcare workers. Many private equity investors still have significant amounts of dry powder, so there is capital available to invest in deals. We expect to see more public-to-private transactions in the year ahead. In Australia, Slater & Gordon, the world's first listed law firm, was taken private last year by private equity firm Allegro Funds, which is one of WAM Alternative Assets’ investment partners, in a successful off-market takeover bid.

We see an opportunity for private equity players specialising in carve-outs and restructurings, especially for businesses that have complex organisation structures, where not all of the sub-divisions within those businesses are profitable.

Last year, Allegro Funds invested in the acquisition of accounting giant PwC Australia's Public Sector advisory business. Allegro Funds is now investing $100 million in the operation, which has been renamed Scyne Advisory. The domestic market for such deals is not large, with only two or three local players who can execute it in a meaningful way. However we can potentially see big global private equity players like Oaktree, Blackstone and KKR coming into the local market for these transactions.

In Australia, there has also been a structural shift in the market when we talk about private debt. Ongoing inflows of institutional capital from offshore is providing further opportunities for non-bank lenders to increase their share of lending to private equity investors. The Australian private credit market contains a variety of different loan structures and instruments that provide bespoke solutions to accommodate many different risk and return objectives for institutional investors. We believe the local market will continue to provide a huge opportunity for private lenders.