CIBC US Middle Market Investment Banking’s Alex Eskra and Dylan Harkness join Ron Miller to discuss the current state of U.S. middle market M&A. They discuss M&A transaction volume, private equity activity, valuations, and the credit markets, as well as the outlook for 2025 and the uncertainty tariffs are creating in the market. Dylan also provides his insights on current trends within the consumer sector.
Ron Miller: Welcome to the Monitor by CIBC's US Middle Market Investment Banking Group, a podcast series focusing on key insights, strategies and trends in the US Middle Market landscape. I'm your host, Ron Miller. In today's episode, I'm joined by Alex Eskra, Director at CIBC, US Middle Market Investment Banking, and Dylan Harkness, a Director in our Consumer Vertical. Alex and Dylan bring a wealth of knowledge from their respective areas of expertise. Alex will be discussing the broader M&A market, including transaction volumes, private equity activity, valuations, and the debt markets. Dylan will provide his insights into consumer sector trends and challenges. Additionally, we'll explore the outlook for 2025 and discuss the potential impact of tariffs on M&A activity. Alex and Dylan, thanks for joining me today.
Alex Eskra: Thanks for having me back, Ron.
Dylan Harkness: Looking forward to it,
Ron Miller: Alex, let's kick off with transaction volumes. How did deal activity shape up in 2024? And what are we seeing as we move into 2025?
Alex Eskra: Yeah, it's a good question, Ron. So, you know, activity in 2024 was a bit mixed. Total transaction volumes for deals under 500 million of enterprise value declined about, you know, nine and a half percent compared to 2023, which is reflecting ongoing economic uncertainty, higher interest rates, you know, things we've been talking about for the last several quarters. To put that in perspective, deal volume is still down 33 percent below the pre-COVID five-year average. That said, there are some encouraging signs towards the end of the year. Q4 of 24 saw a notable rebound with transaction counts increasing by 13% year over year. This uptick suggests that market conditions are finally stabilizing, perhaps, and there may be some renewed confidence by buyers.
Ron Miller: That's good to hear about the rebound in 2024. What are the drivers of the potential rebound that you see into 2025?
Alex Eskra: Yeah, so I think a lot of folks have been talking about a potential recovery in 2025. First and foremost, their financial sponsors are sitting on over a trillion in dry powder that needs to be deployed, which should support deal activity going forward. Second, lending markets remain supportive. There's been gradually easing credit conditions, which have been creating a more favorable environment for financing transactions. And third, there's a lot of optimism around regulatory easing under the new administration, which could stimulate M&A activity, particularly for strategic buyers pursuing consolidation opportunities. However, despite this backdrop, it's not all smooth sailing. Early 2025 has seen a lot of headwinds, including geopolitical turmoil, uncertainty around tariffs, and just global trade policies in general. These factors have created a lot of caution around buyers and sellers, delaying what was an expected rebound in the M&A markets and leading to lengthened due diligence processes and delayed closings depending on the industry.
Ron Miller: Dylan, let's bring in your perspective on this topic. How are transaction volumes playing out in the consumer sector?
Dylan Harkness: Thanks, Ron. So if we look at the consumer sector specifically, it had a modest recovery in 2024 with transaction volume increasing by about 5% compared to 2023. However, I think it's important to note that deal activity still remains 18% below the pre-pandemic average from 2015 to 2019. And we think this is an environment that is likely to persist well into 2025. This reflects the broader challenges we've seen across the lower middle market, including economic uncertainty and rising interest rates.
Ron Miller: Thanks Dylan. Alex, private equity is always a key barometer of M&A activity. What trends did we see in 2024 and how are things evolving in 2025?
Alex Eskra: Yeah, so 2024 did show some signs of recovery for exit activity for private equity following challenging couple of years here after COVID. Exit volumes began to rebound noticeably in Q3-24 as a result of improving market sentiment and stabilizing macroeconomic conditions. However, there's been this cumulative impact of all the prior uncertainty, which has created a pretty significant backlog of portfolio companies that are awaiting exit. One of the other factors that's impacting a potential rebound here would be there are tons of private equity funds that are nearing the end of their life cycle, which is putting a lot of pressure to generate liquidity events for their investors. In Q4, we saw that that exit activity continued its recovery, but it was rather measured just due to lingering valuation gaps between buyers and sellers and just overall cautious buyer sentiment. This has resulted in an increased reliance on continuation funds as an alternative for traditional exits. These funds have become a pretty critical tool for PE firms, particularly for those really high quality assets that would be undervalued in the current market.
Ron Miller: Dylan, any private equity insights as it relates to the consumer sector?
Dylan Harkness: Yeah, Ron, so the consumer sector still remains an attractive investment area and focus area for private equity investors, but it's not without its challenges. Tariffs have introduced significant pricing volatility for consumer companies that are reliant on global supply chain. I think a good example is if we look at food specifically, inflation is still putting pressure on businesses within this sector and due diligence periods have extended. Transaction timelines as buyers assess exposure to rising costs and potential supply chain disruptions. For companies that demonstrate resilience to these challenges, such as those with reshored operations or diversified sourcing strategies, the market still remains highly favorable for these type of companies.
Ron Miller: Alex, let's shift to valuations. How did valuations fair in 2024?
Alex Eskra: Yeah, I mean, multiples remain pretty resilient throughout 2024, holding steady at 7.2 times EBITDA. I think it's noteworthy that this persisted despite some challenging market conditions. We continue to have sort of elevated interest rates compared to what we've been used to over the last decade and ongoing economic uncertainties. There's several factors that contributed to the steadiness. There's a continued focus on high quality assets. Smaller deal sizes and add on acquisitions that are easier to finance. Both direct lenders and commercial banks continue to be eager to allocate capital, particularly in sectors like manufacturing where valuations improved by nearly half a turn compared to what we saw in 2023.
Ron Miller: That's encouraging. Are there any specific sector trends that are worth noting?
Alex Eskra: Yeah, I mean, I think it's kind of a mixed bag and multiples varied across industries in 2024. I mentioned manufacturing before, that averaged at about 6.9 times EBITDA, which was up from 6.5 in 2023. Business services maintain pretty consistent valuations at 7.2 times, really underscoring the sector's resilience and attractiveness due to the sticky customer relationships and essential offerings that are a safe bet in times of economic uncertainty. On the other hand though, healthcare services saw a decline from 8.9 times in 23 to 7.7 times in 24, which was largely just driven by increased regulatory scrutiny and evolving reimbursement models in the healthcare industry. The other thing I noticed is that technology valuations also fell from 10.2 times EBITDA in 23 to 8.1 times last year just due to broader market corrections and a lot of uncertainty surrounding some emerging technologies.
Ron Miller: Alex, some interesting trends that you just identified. Dylan, what are you seeing in the consumer sector regarding valuations?
Dylan Harkness: So consumer product companies have seen stable valuations overall but are navigating unique challenges tied to inflationary pressures and tariff-related uncertainties as well. Companies with strong unit growth and tariff resilience are commanding premium multiples despite these headwinds. Additionally, we've been seeing buyers place a greater emphasis on domestic supply chains and operational efficiencies when evaluating targets in the space.
Ron Miller: Alex, let's turn to the debt markets. Are there any notable trends as 2024 closed out?
Alex Eskra: Yeah, there's actually quite a few, Ron. So, you know, again, 2024, despite, you know, a lot of challenging market conditions, debt multiples for lower middle market LBOs averaged about 3.7 times, which is up just slightly from 3.6 in 2023 and fairly consistent with the historical averages. The stability was largely driven by two factors, a moderation of inflation and the Federal Reserve's decision to pause continued rate hikes, which eased a lot of the upward pressure on borrowing costs. One of the more notable trends was the institutional loan issuance in 2024, which reached $1.4 trillion, 250% increase from 2023, which is pretty remarkable. A lot of that activity was driven by repricing and refinancing, as borrowers work to reduce their interest costs and push out their maturities. Your repricing activity, for example, hit $757 billion in 2024, which is the largest on record compared to $430 in 2017. And this is largely fueled by strong investor demand and tightening credit spreads in the leveraged loan market. This activity is notable because it's reduced the near-term maturity wall pretty substantially. For example, as of December 2024, there was only about 18 billion in loans set to mature by the end of 2025, which was an 82% reduction from some of the earlier forecasts. Borrowers have also pushed back maturities for loans due in 26 and 27 by pretty substantial margins, which is just reflecting a broader, more concerted effort to manage some of those financial obligations more effectively. I think one of the things that we should be aware of sort of going into 2025 here is that since year end, a lot of the credit spreads have widened. And our anecdotal experience is that credit market is tightening slightly here. So the next couple of months will be really interesting because there's some great underlying fundamentals for the debt markets. But we'll see if a lot of the uncertainty shifts that as we move into 2025.
Ron Miller: Thanks, Alex. That's very interesting because as we know, the health of the debt market is very correlated to the valuations and availability in the M&A market. Dylan, let's turn to consumer and dive in a little more. Consumer businesses have faced significant challenges recently, including inflation and tariff uncertainty. How are your clients navigating this landscape?
Dylan Harkness: That's a great question, Ron. I think we are seeing a few strategies early on that make sense to mention. From a supply chain angle, companies are starting to diversify their sourcing to include more domestic options while simultaneously negotiating with suppliers for more optimal pricing. Additionally, companies have begun leveraging free trade agreements or reclassifying certain products in order to reduce or eliminate tariffs. And finally, and probably most important, companies are thoughtfully looking at pricing strategies. It's a balance of determining how much of the added costs they can absorb versus how much they can pass along without alienating certain customer groups.
Ron Miller: Thanks Dylan. What characteristics are buyers looking for in consumer products companies that are trying to get premium multiples in this market?
Dylan Harkness: I think in order to justify a premium valuation in today's environment, you have to have a mix of a few items, which I'll list below. The first is strong brand recognition. That can be brand equity, brand perception, or brand loyalty. Additionally, you need to show high growth potential. In 2024, consumer product companies became much too reliant on price increases. So this year will be all about showing volume growth. Additionally, you need to have innovative products. This can be high growth single skew product companies or companies with an evolving portfolio to maintain a competitive edge. Ultimately, what is most important is to maintain high performing skews and reduce skew complexity in order to boost sales growth and see margin expansion. And lastly, all companies will need to show strong profitability and now more than ever a resilient and robust supply chain.
Ron Miller: Thanks, Dylan. Alex, I want to come back to two things you talked about, tariffs and the overall outlook for 2025. How are these both influencing M&A activity and what can we expect for the rest of 2025?
Alex Eskra: That's a good question, Ron. Tariffs overall that have been imposed by the current administration have introduced a significant amount of uncertainty into the M&A markets, particularly for industries that are reliant on global supply chains, things like automotive, electronics, agriculture, beverage production, just to name a few. Tariffs on Chinese imports are set at 10% while there's rates as high as 25 to 50% that are potentially being applied to goods from Canada, Mexico, and the EU. These measures are overall, there's driving up input costs for companies and forcing them to either absorb these costs or pass these on to consumers. In the context of our world, this has created headwinds for cross-border transactions. For industries heavily impacted by tariffs like manufacturing, there's a lot of deals out there that have just stalled as companies reevaluate their financial outlooks and supply chain strategies.
Ron Miller: Are there any silver linings on the tariff question?
Alex Eskra: Yeah, I mean, think, you know, domestically focused M&A is faring a lot better in the short term, particularly as companies with reshored operations or, you know, diversified sourcing strategies are positioned to outperform their peers that are reliant on those international supply chains. Additionally, I'd say that if tariffs succeed in reshoring manufacturing activity, this trend could drive a lot of consolidation opportunities for domestic manufacturers that are seeking scale or exemptions from tariff related costs. I think a lot of that remains to be seen, how effective that strategy is in driving US manufacturing.
Ron Miller: Alex, you started out very positive as we began this podcast. You've shared some headwinds. How does the broader outlook look for 2025 for M&A activity?
Alex Eskra: Yeah, I mean, I think there's still some underlying trends that people should be aware of in 2025 that we can remain cautiously optimistic. We'll see a rebound in M &A activity. A couple of tailwinds that we've already talked about, but financial buyers have over a trillion of dry powder that's waiting for deployment. Lending markets so far remain supportive. We talked about it earlier, but it remains to be seen how some of the uncertainty is borne out in the data. I think if there's regulatory easing under the new administration, that could stimulate deal making, particularly for strategic buyers. And then we talked about this in the last couple of podcasts, but there's a lot of private equity funds that are nearing the end of their life cycle, and they have a significant backlog of portfolio companies that need to exit. That said, early 2025 has definitely been off to a slower than expected start. Deal volume is down somewhere between 25 and 30% year over year based on some of the recent conversations we've had with our private equity partners. And then on top of that, you have geopolitical turmoil, all the tariff uncertainty, and all of those things can sort of present headwinds that could dampen activity in certain industries.
Ron Miller: Great. What a conversation. Well, thank you, Alex and Dylan for your insights today. I think there are some clear takeaways. There were definitely some positive trends at the end of 2024, notably an increase in transaction volume in Q4. Private equity exits started to recover in late 2024, with continuation funds emerging as a key tool. to bridge valuation gaps and affect the closeout of some private equity funds. Middle market valuations really stayed stable at nearly 7.2 times, supported by high quality assets and improved credit conditions. The debt market was quite favorable in 2024. Repricings and refinancing activity reduced the near term maturity wall, supported M&A transactions. And easing credit conditions last year were supportive of the M&A market. However, the tariff and policy uncertainties have extended due diligence times, added caution in some of the M&A markets, and created some notable headwinds. But the overall strength of the economy last year and the pent-up demand is still likely to be favorable for the M&A market later this year and into 2026. So Alex and Dylan, thank you for your time again and thanks to our listeners for tuning in.
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