2023 Opportunities & Challenges
Heading into 2024, we look back on 2023 as a year that was full of opportunity, yet not without challenges, including macroeconomic uncertainty, a dynamic interest rate environment, and ongoing geopolitical instability.
"Despite these variables, many Harris Williams clients garnered significant attention from investors, proving the enduring appeal of businesses with top-quality, differentiated business models, defensible market positions, and resilient revenue," notes Bob Baltimore, co-chief executive officer. "In 2024 we see continued success for businesses demonstrating those characteristics."
"Investors are focused on proof points that show the company’s strategy is working. They want to see traction against key initiatives and that financial trends accurately reflect the growth and long-term potential of the business, and that it is not just a robust economy that is driving success," says John Neuner, co-chief executive officer. "Our job as advisors is to make sure we listen to our clients, deeply understand the nuances of their businesses, and help them effectively convey their stories and visions. Those stories need to be both qualitative and quantitative, with the details and data needed to convey what makes the business unique and valuable."
A handful of recent Harris Williams clients illustrate the qualities that drove success in 2023.
Primary Fund Placement
The Incline Equity Partners VI, L.P. fund closed with more than $1.9 billion of aggregate capital commitments. The fund significantly exceeded its target, largely due to Incline’s consistent track record of driving value and delivering returns for their investors, portfolio companies, and employees. The fund will continue Incline’s proven strategy of investing in Durable Businesses with Multiple Ways to Win™ across the value-added distribution, business services, and specialized light manufacturing sectors.
Strong customer relationships, market position
BradyIFS is a national janitorial supply, equipment, and foodservice supplies distributor with differentiated service, product expertise, end-market diversity, and customer relationships, paving the way for a merger with Envoy Solutions. Reflecting the company's continued growth and value creation potential, Kelso, Warburg Pincus, and BradyIFS management will become majority owners and control the board, while FEMSA will maintain a significant minority share.
Essential products & attractive end markets
GME Supply Company provides worker safety and productivity supplies to field-deployed technicians in the large, resilient, and growing telecommunications, utility, and renewables end markets. The mission-critical nature of these items combined with GME’s technical expertise and market-leading position drove broad investor interest and excitement, resulting in a partnership with Incline Equity Partners.
Non-deferrable demand & superior scale
Groundworks, one of the nation’s largest residential services companies focused on water management services, offers a range of non-discretionary home services with non-deferrable demand and is one of the most scaled operators in its large and fragmented space. That appeal generated strong buyer attention, culminating in its purchase by KKR.
Unique business fills a strategic gap
Systems Control is a leading designer and manufacturer of customized, highly engineered control and relay panels and electrical substation control buildings supporting transmission and distribution assets for the utility industry. As Systems Control is one of the only fully integrated turnkey solutions providers of scale in its industry, it was a strategic acquisition for Hubbell (NYSE HUBB), a top manufacturer of utility and electrical products.
Differentiated products and attractive markets
IQI Trusted Petfood, a Netherlands-based global provider of premium pet food ingredients, offers a wide range of “claim” ingredients to manufacturers, allowing them to differentiate their products among consumers. Operating in two very attractive markets–pet food and ingredients–IQI received strong interest from both strategic and financial investors. It was purchased by OSI Group, a U.S.-based supplier of food products to leading global brands.
Multi-Asset Continuation Fund
ABS Capital is a leading growth equity firm with over three decades of experience scaling software and tech-enabled B2B businesses. Their multi-asset continuation fund enables ABS to extend their ownership of LabConnect, a provider of central lab services for pharmaceutical clinical trials, and Viventium Software, a human capital management SaaS provider. This transaction provides additional time and capital for growth opportunities and initiatives for both companies while also offering liquidity to existing limited partners.
Primary Fund Placement
The Incline Equity Partners VI, L.P. fund closed with more than $1.9 billion of aggregate capital commitments. The fund significantly exceeded its target, largely due to Incline’s consistent track record of driving value and delivering returns for their investors, portfolio companies, and employees. The fund will continue Incline’s proven strategy of investing in Durable Businesses with Multiple Ways to Win™ across the value-added distribution, business services, and specialized light manufacturing sectors.
Strong customer relationships, market position
BradyIFS is a national janitorial supply, equipment, and foodservice supplies distributor with differentiated service, product expertise, end-market diversity, and customer relationships, paving the way for a merger with Envoy Solutions. Reflecting the company's continued growth and value creation potential, Kelso, Warburg Pincus, and BradyIFS management will become majority owners and control the board, while FEMSA will maintain a significant minority share.
Success in a Complex Environment
"One of the key success factors for all of these engagements was tailoring our approach to individual circumstances," says Neuner. "We continue to operate in a complex and dynamic environment. It’s never been more important to deeply understand our clients' goals and craft a strategy to unlock their full value and identify the right partner for the future of the business. That might mean an acquisition by a strategic buyer, a merger with a complementary business, an investment from a private equity partner, or a continuation vehicle. Upfront work and candid conversations with buyers and sellers have been and continue to be essential."
In this increasingly complex environment, we have steadily invested in our ability to meet a wider range of client needs. In addition to augmenting our global reach and adding senior bankers across industry sectors and geographies, Harris Williams has gained new expertise in an array of private capital advisory services.
"Demand for primary and secondary private capital solutions continues to grow," says Eric Zoller, head of private capital advisory. "In challenging macro environments, sponsors and limited partners seek a broader range of services and a more tailored set of solutions to maximize the value of their investments. Our goal is to serve our clients at every point in their life cycle. Private equity group interest in retaining a stake in high-performing businesses beyond traditional hold periods continues to grow, especially for the type of marquee companies Harris Williams is known to advise."
Zoller notes significant potential for secondary transactions to become more common in years to come, and highlights team expansions to address that growing need, including the addition of private capital advisors covering Europe.
Read More on Our 2024 Private Capital Markets Outlook >
"Our long-term strategy is to continue to provide honest, thoughtful advice that reflects a changing environment and more complex transactions," says Frank Mountcastle, head of M&A. "Combining our experience in private capital solutions with our deep industry knowledge, trusted relationships, and execution expertise enables us to be true thought partners to our clients, helping them achieve their definition of success."
Many Reasons for Optimism in 2024
As we set our sights on client success in 2024, we are encouraged by signals of improving macroeconomic conditions and an increasingly confident market.
"There are many reasons to be optimistic about M&A and private capital activity heading into 2024," says Baltimore. "Those include cooling inflation, a resilient labor market, a positive stock market trajectory, and stable interest rates. Looking ahead, potential rate cuts could be an additional catalyst for deal-making conditions."
In addition to these tailwinds, third-quarter earnings for S&P 500 companies grew for the first time in a year, with positive outlooks for Q4 and 2024.1 Relatedly, public companies have been active M&A buyers, buoyed by substantial cash on their balance sheets and an opportunity to compete in sale processes while private equity buying has slowed. As shown in Figure 1, corporate cash balances equaled nearly $2 trillion in 2023, up significantly from 2022.2
Figure 1: S&P 500 Corporate Cash Balances
Source: CapitalIQ
Figure 2: Private Equity Dry Powder
Source: Pitchbook – includes investors whose primary investor type is PE
Buyers will find ready sellers in 2024, including private equity groups eager to deploy capital (Figure 2) and generate liquidity for their limited partners, particularly with some hold periods extended due to market uncertainty. Buyers and sellers alike will be supported by a healthy and active lending market, with improving leverage multiples and pricing.
At the same time, the outlook is not without risks. One continued consideration is the potential for a U.S. recession, on which economists have mixed—yet broadly improving—views. And while corporate earnings are improving, some companies may struggle to manage their more expensive debt. The upcoming U.S. election and ongoing global geopolitical conflicts could also disrupt markets, yet they remain unpredictable.
"Past election cycles have had limited impacts on M&A, and our market has been somewhat insulated from global volatility," notes Neuner. "But we live in a dynamic and complex time and will continue to pay close attention to events and their potential impacts on our clients."
Likewise, our analysis suggests that even if a brief, mild U.S. recession occurred in 2024, its impacts on M&A may be limited. As shown in Figure 3, private equity exits generally track GDP growth, falling during recessionary periods. However, 2023 saw prolonged market uncertainty hampering M&A, even without evidence of a recession.
Figure 3: Private Equity Exits Versus GDP
Source: Pitchbook, FRED.gov, Harris Williams analysis
“That suggests that it is possible that private equity exits have already bottomed out. Private equity is eager to generate liquidity for LPs, and this pent-up demand is a key reason M&A would continue improving through that recessionary period,” says Baltimore. “That favorable outcome seems particularly likely considering that any economic slowdown would probably be coupled with Fed interest rate reductions.”
Overall, the balance of these opportunities and risks leaves us optimistic about the outlook for 2024, with a steady acceleration expected across the eight industries we cover.
With a strong pipeline of engagements and substantial growth potential ahead, we are deeply grateful for the trust our clients place in us and the opportunity to help them unlock the value in their businesses. We look forward to working together closely this year.