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Private equity firms and public companies have a stash of cash – and it’s time to do something with it.

“High-net-worth individuals and corporate investors have invested in these funds, and they’re investing with the expectation of a given return,” says Jim Geuther, Cleveland market president for SunTrust Banks. “They aren’t going to be satisfied if their investment remains in cash.”

The pressure is on both groups to deliver for investors in 2019. Fortunately, dealmakers should feel encouraged by the M&A climate, despite the dramatic ups and downs on Wall Street, ongoing political uncertainty in Washington and talk of another recession.

“Signs are pointing to a strong market in 2019, with the first half likely being better than the second,” says EY’s Chris Smyth, the firm’s Central Region Transaction Advisory Services leader. “The economic outlook remains positive, and companies are trading at high multiples, though there has been significant market volatility recently, which creates some challenges for those looking to transact.”

In our Dealmakers Look Ahead, we talk with Geuther, Smyth and other dealmaking experts about what to expect in 2019.

What trends will have an impact in 2019? 

Smyth: According to EY’s twice-annual Capital Confidence Barometer, dealmaking optimism remains positive, up from a year ago. In pursuing M&A deals, companies are looking to tap new markets, innovate through transaction, navigate trade policy and adapt to new customer behaviors. Of course, the story varies by industry sector.

For example, sectors that are vulnerable to cycles, such as automotive, may start to pull back on some deals where the valuations are just too high. Other sectors to watch include media and entertainment, where values are up 200 percent year to date and executives are adjusting strategies to match the consumption habits of younger viewers. And diversified industrial product companies are pursuing the digital future of smart factories, streamlined supply chains and the internet of things, driving values up 78 percent.

Here in the U.S., dealmakers are focusing on domestic M&A, but cross-border deals remain on the table. The top four non-U.S. destinations are Canada, Brazil, Mexico and Argentina, in that order. Concerns over Brexit have lowered the desire for UK deals.

Baiju R. Shah, CEO, BioMotiv: Health care investment activity in 2018 was very strong across the board, but especially in biotech, driven by one of the best biotech public offering markets ever. The sector fundamentals — significant unmet patient needs, promising innovation technologies that can address them, pharmaceutical companies looking to acquire products for their pipelines and an improved FDA regulatory environment — all point to an equally active 2019 in terms of private and public fundraising and dealmaking.

Todd Federman, managing director, North Coast Angel Fund: Although it’s never easy to raise early-stage capital, many of Cleveland’s angels have now seen several investment cycles. The region’s early-stage investors are more experienced and better informed than ever.

We continue to see high-quality investment opportunities in the startup environment. About half of our companies go on to raise institutional venture capital, and we expect that to continue into 2019. Most of the deals we lead are successful in achieving their capital-raising goals. Over the past several years, we’ve been fortunate to be able to build syndicates of investors to fund $1 million to $2 million rounds.

Geuther: The M&A market is quite good. We think it’s driven by four significant dimensions. Business owner confidence remains elevated relative to history. There’s abundant liquidity in the market, financing remains available and valuations relative to history are also elevated. Those four dimensions have been themes for the support of 2018, and we think that will carry into 2019.

We’ll finish this year with a good roster of successfully closed transactions. We think next year will be equally active when we look at the pipeline as it stands and our dialogue with clients.

What trends could affect dealmaking activity in 2019?

Smyth: The increasing frequency of portfolio reviews is driving divestments and generating more opportunity for private equity. This is creating a more competitive market in the U.S. Attitudes toward divestitures are changing as investors pressure companies to maintain or improve margins and payouts. Many executives are saying that the main result of their most recent portfolio review was divesting an asset identified as underperforming or at risk for disruption.

Dealmakers are also learning that they need to rethink their approaches to integrating assets, especially as more companies make acquisitions outside their industries to meet changing customer demands. Synergies are not being achieved at expected levels, which means that integration needs to be started earlier in the M&A life cycle. Talent is a factor here, too, as onboarding and retaining talent is the top challenge executives face when integrating an acquired company.

 In what other ways could the glut of liquidity impact dealmaking?

Geuther: You have 11,000 businesses, both private equity and public, that are having to deploy liquidity. Essentially, they are professional M&A experts, and when they start to dialogue with private companies, you have a disturbance. You have professional dealmakers facing off against business owners who may have never been involved in an M&A transaction. We think this is where practices dedicated to helping middle-market companies can provide a lot of value.
From a financing standpoint, banks continue to have a need to deploy capital, as well. It’s a very frothy banking environment.

Shah: Health care investment firms are flush with cash, as many have raised recent, significant funds. In addition, over the past year, many new types of investors have begun to participate in the health care space. These include overseas family office investors, new corporate investors (beyond traditional life sciences companies) and also many impact investors — investors looking to earn returns and have a social impact. These new entrants and their capital add further fuel to the sector into 2019 and beyond.

Is there reason to be concerned about the second half of 2019?

Smyth: Executives are closely watching potential disruptions, but there are few signs pointing to a slowdown in the near term. The greatest potential risks to dealmaking in the next 12 months are regulation and political uncertainty, and difficulty identifying high-quality assets. We’re seeing increased activity in corporate venture capital and strategic partnerships/alliances, which can be a good way to get access to intellectual property, technology, etc., where there are valuation expectation challenges.