Acquisition finance market rebounds in 2024 after adjustment period

Despite the difficulties that occurred in 2023, analysts agree that this year marks a change in the market, with very positive growth prospects. Sectors such as data centers or renewable energy will benefit significantly.

With two months to go before the end of the year, the trend forecast for early 2024 is confirmed. According to data from the second quarter of this year, and also for the first time, outflows from the high-yield segment were mainly due to rating upgrades, rather than defaults or withdrawals. Specifically, 56% of exits were due to improved operating performance and credit metrics. This contrasts with 33% in the first quarter of 2024 and 63% in the second quarter of 2023. This renewed dynamism is not due to a sudden increase in appetite for acquisitions, but to a readjustment in valuation expectations among buyers and sellers.

In the words of Jean François Guicheteau, Head of Leveraged Finance MidCap at BBVA CIB:  "Against all odds, the first half of the year has been positive. The key to this start of recovery does not lie in a greater investor appetite but in an adjustment in valuations. By accepting more realistic multiples, sellers are making it easier to close transactions and obtain financing for new acquisitions."

This adjustment has allowed the market to return to growth, leaving a very complicated 2023 for these types of transactions. According to Guicheteau, "While the previous period was marked by portfolio and recapitalization transactions, the acquisition market showed signs of revival in the first half of the year. We expect this upward trend to consolidate in the coming months, with a significant increase in the financing of new purchases."

Despite the volatility in the market, private equity funds have remained consistently optimistic. This, together with the positive investment expectations for 2024, has become a key lever for the reactivation of the market. However, the short-term outlook for private equity remains conditioned by four factors: high interest rates, although recent cuts have brought greater stability; valuation divergence, although the gap is narrowing; the slowdown in fundraising by mid-cap funds; and elections in several countries, including the United States, along with heightened geopolitical risks, which historically tend to reduce trading volumes.

It is important to note that while private equity funds continued to execute transactions, the slowdown was largely due to price differentials. The value of the assets was far from the sellers' expectations, paralyzing transactions.

"Now the scenario we find ourselves in has nothing to do with it, as the prospects of buyers and sellers are closer, thus generating a stimulus in the market".

Key sectors and a very optimistic future

Transactions that combine bank financing with financing from institutional investors, such as private equity funds, are becoming increasingly common.  This is because institutional funding prices have fallen, becoming more competitive than last year, when their high cost made them less attractive to customers. This combination makes it possible to create more flexible and advantageous structures.

Guicheteau concluded: "At BBVA, we are making an important commitment to financing sectors such as data centers and related sustainability projects, especially those related to renewable energy. In terms of leveraged finance, we are also seeing very sustained activity with solid growth compared to last year, partly because our clients are investing more than in 2023 and we are accompanying them in this phase of their investment cycle."