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While private equity fundraising is expected to fall below 2019 totals this year, venture capital-to-private equity buyouts will continue to proliferate and there will be continued expansion in growth equity deals, according to PitchBook’s 2020 Private Equity Outlook.

“Most of the large PE firms — including Blackstone, Vista and Leonard Green — raised record-setting sums in 2019 and will be in the capital deployment phase next year,” states the report. “While 2020 PE fundraising is sure to be strong when compared to almost any other year, there are currently few funds in the market targeting more than $10 billion.”

Locally, there is optimism that 2020 will be another big year for dealmaking in Chicago.

“I think there’s going to be a lot of deal flow and revenue growth,” says Tom Gimbel, founder and CEO at LaSalle Network. “I also think the stock market is going to continue to grow, so you'll see a lot of deals with stock instead of cash. On the private equity side, people are a little bit past thinking that the run is almost over. I think they realize that it’s a good economy, it’s not slowing down, and they’re not afraid to buy.”

We spoke with Gimbel, Sun Acquisitions’ Domenic Rinaldi and Cendrowski Corporate Advisors’ Harry Cendrowski to get their thoughts on what to expect from a dealmaking perspective in 2020.

What are some trends that could shape deal activity in 2020?

Rinaldi: We are headed into an election year, and my experience has been that you typically see a slight slowdown in M&A activity. That said, in the lower middle market, we have seen a solid uptick in add-on M&A activity led by price/earnings to growth for portfolio companies. If the labor market remains tight and interest rates remain low, I believe we will continue to see robust add-on acquisition activity in 2020.

Cendrowski: The trend of the last two quarters of 2019 will continue into 2020. Seller pricing with the run-up in the stock markets is making it more difficult for funds to buy.

Gimbel: There is a lot of dry powder and a lot of people who want to do acquisitions. Everybody is looking for the same good deals. On the private equity side, they’ve got money they have to spend, and they’re churning hard to try to find good deals. We’re seeing our search practice on the financial analyst and operational analytics side has been going strong because companies want to make sure that they’re really analyzing the data, in addition to external resources that they use. We’re also seeing companies say that if they can’t find deals at the right dollar amount, they’re hiring up. Our sales recruiting practice has never been hotter because companies are saying we’re still going to build up our own sales team while we look for new deals.

What are some potential issues that could affect your expectations one way or the other?

Rinaldi: A global recession or an escalation in our trade war with China could certainly have an impact on M&A activity. If we see a weakening in the labor market, that could create organic growth opportunities for companies and lessen the need to acquire talent, technology, etc. Conversely, a strong economy and continued low interest rates could accelerate the velocity of add-on acquisitions because our strategic clients are having such a hard time growing organically.

Cendrowski: Since 2020 is an election year, more sellers might want to complete their sale so they can plan for their taxes. Uncertainty will be a factor. If we have a change in the presidency, taxes could go up significantly.

Gimbel: You’re going to see really strong deal flow, and I’m hearing that from companies that are asking me about hiring people. Consulting, bankers and acquirers are saying to me all the time, ‘What’s the flow of people, so when we do acquisitions, we can add bodies?’ I think it’s pretty vibrant.

Will there be any shift away from what’s been a seller’s market?

Rinaldi: In the short term, if the economy remains stable, I believe this will continue to be a sellers’ market. Longer term, the scales will shift regardless of what happens in the economy, given the large percentage of lower middle-market companies owned by baby boomers and their exit from those companies. There should be a significant amount of companies coming to market, which should create downward pressure on company multiples. The only thing I see offsetting this macro trend is the availability of workforce talent. If the labor market remains tight due to both the economy and the large number of baby boomers exiting the workforce, acquisitions might become the primary vehicle to remain competitive and prop up the M&A market. There are many factors that will influence this narrative, but if I were a potential seller, I would think strongly about exiting before any large exodus of baby boomers from their businesses.