How bad is it out there in the deal world? Three measures from Catalysis
We all know - by all the main metrics - that deal volumes and value have decreased significantly over the last, say, 18 months. Buyers and sellers both appear more reluctant to transact due to uncertain valuations, costly debt and economic sluggishness. From the perspective of a due diligence provider, it feels like deals are slower to start and slower to finish.
However, it is often useful to test feelings with data. So, in that context, we have dug into three dimensions of deal activity to see how gloomy it is reasonable to be.
Likelihood to abort
In principle, one would expect greater nervousness around deals to cause more processes to abort. However, looking at our list of transaction-related projects since 2010, the rate of aborts has decreased significantly: of projects started in 2010 – 2015 (a period when the deal world was steadily recovering from the great financial crisis) almost half aborted. By contrast, fewer than a sixth of deals we have worked on since the start of 2022 fell over.
What these figures don’t capture is the probable growth in ‘zombie deals’ which neither complete nor quite die. Moreover, we would guess that several those marked in the ‘in progress’ category above will end up aborting which may push the overall abort rate closer to 20%.
Time to completion
Catalysis has recently experienced multiple cases of deals which have taken unusually long to complete: one recently took 14 months between the point at which we registered the project in our workflow system until the date of formal completion. A couple more ‘in progress’ seem determined to reach their one year anniversary. The time between completion and payment also seems to have grown as banks take longer to create Newco accounts.
However, looking over the last three years for which we have detailed data, it is striking that the average interval in days between project registering and completion has, in fact, been surprisingly stable despite the shift from deal boom (2021) to down market (2023) – just over three months.
The quality of vendor management teams
One comment we have heard over the last year is that even where the quality of opportunities reaching investors has been maintained, the average quality has fallen. The idea seems to be that only vendors who need to sell are coming to the market. Investors will have their own metrics for measuring quality, but one which Catalysis can offer is our view of widely defined management quality. Although measuring quality at individual, team and organisational level is complex and ultimately subjective, we carefully consider overall levels of ‘challenge and complexity’ (how difficult the context that teams are facing - including the level of ambition in the growth plan) and management ‘horsepower’ (the various kinds of capacities and capabilities available to handle that challenge). For internal purposes, we assign percentage values to those to allow compare and contrast between projects.
Looking across three periods for which we have the relevant data, we can see striking levels of consistency in both categories. There is no sign of significant shifts in horsepower nor in the level of challenge we are seeing.
The challenge scores might seem counter-intuitive considering the roller-coaster of events we have lived through in recent years. However, the deal filtering process means that sectors affected by Covid (e.g. retail and consumer) have faded out of the deals covered by these figures while others (SaaS, tech-enabled services) became more prominent. Plans may also have been scaled back to make them more executable despite headwinds.
Conclusion
Overall, the evidence here is more positive than expected. Aborts have shrunk over time. Time to completion doesn’t seem to have grown on average. Management quality in the deals Catalysis has worked on hasn’t dropped. So, although we greatly look forward to the more energised deal market our corporate financier friends keep signalling, present conditions are not as gloomy as they can sometimes feel.
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