Following high levels of inflation last year, interest rates, cost of capital, and pricing uncertainty led to a more conservative approach to dealmaking in 2023 – something that Kain said meant more deals were “falling over” during due diligence.

“In a tighter credit market, some large-cap deals were not digestible as they struggled to source the capital needed to transact, leading to lower activity levels in that part of the market. With buyers focused on quality, the small-cap deals which tend to be less mature and therefore riskier investment propositions struggled to gain traction. This was exacerbated by an inability or reluctance for some VC and pre-IPO players to deploy additional capital,” he explained.

The ‘Goldilocks zone’ was the mid-market, which in our world is deals between $50 million and $1 billion. Mid-market assets tend to be more mature with the better-quality earnings appealing to a more defensively minded market. They are also a size that is easier to fund with equity and are less reliant on debt to complete.

“For such assets PE remained active, as we saw in advising Roc Partners on its acquisition of Pace Farms, which was reported to have been one of Australia’s larger PE deals for 2023. However, while buyers remained active they also remained selective. With buyers taking more care with deal risk, deals were slower to commence, took longer and carried a greater risk of falling over,” Kain said.

Trends in private markets also translated to the public market.

“The trends we saw in private markets were also evident in the public markets. The ASX saw far more appetite to buy companies off the exchange than to IPO them on it. We advised SILK Laser (ASX:SLA) on its scheme of arrangement by which it was acquired by Wesfarmers (ASX:WES) – making it one of the 111 companies delisted from the ASX in 2023,” Kain added.

“This more than offset the 37 listings last year, reducing both the number of ASX-listed companies (down 74) and their market capitalisation (down $43 billion) for the first time in 20 years. That decline is a good indication of the lack of confidence in public markets last year.”

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However, as concerns about higher inflation and interest rates dissipated over the course of 2023, 2024 is likely to see a “slow but steady increase in deals throughout the year, particularly in the mid-market,” according to Kain.

“The continuation of this uptick is already evident in the first quarter of 2024. We expect that buyers will continue to seek to mitigate deal risk with more and higher earnouts. Buyers will also expect sellers to take economic risk to completion with a continuing preference for a completion account over a locked box deal structure,” he added.

“Slower deal activity in 2023 did nothing to reduce the need for many pre-IPO, VC, and PE managers to realise assets. The consequent backlog of saleable assets will drive more sales as managers are eager to realise assets and return capital to investors. So, there will be plenty of assets looking to sell.

“On the buy side, while an opening of the public market will allow some exits to occur by IPO, the market expectation of PE sponsors escrowing larger proportions of their shares for longer periods is likely to see exits favour secondary sales to other PE firms or trade sales. We are now in a decidedly lower growth environment, so we are increasingly seeing companies looking to drive growth through acquisition. Trade buyers will become more active. In short, the outlook for 2024 is a continuing increase in transactional activity fed by greater supply, greater demand and some more mutually realistic pricing expectations.”