At present, the mergers and acquisitions (M&A) market remains below pre-COVID levels, despite a general recovery in financial markets. Investment grade debt and equity issuance have reached record levels, indicating favourable conditions, but M&A volumes remain low. This is mainly due to a tightening of antitrust regulations, leading to extended review periods and a process of self-censorship by companies, which are reluctant to enter into transactions that may be subject to lengthy scrutiny.

The private equity sector, the traditional driver of M&A activity, is also less active, partly because of high interest rates, which are affecting the valuation of assets acquired in a low interest rate environment. Private equity funds are under pressure to generate cash for their investors, but the monetisation of assets is being delayed in anticipation of lower rates.

Continuation vehicles are emerging as a solution for limited partners wishing to liquidate their investments while allowing managers to retain and manage assets. At the same time, the initial public offering (IPO) market is showing signs of recovery, although small and medium-sized companies, which are more like typical IPO candidates, are underperforming compared to the larger companies listed in the S&P 500.

Finally, while there is no shortage of finance, the cost of capital is higher, necessitating pricing adjustments for deals. Funds flowing into credit funds are anticipating a fall in rates over time, which could ultimately support a pick-up in M&A activity if rates stabilise or fall.

 


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