Contrary to fears of a frothy market, current M&A and LBO activity is more conservative than the 2007 era. A key difference is that today's deals involve a substantially higher amount of equity contribution from buyers, making them structurally less risky than those seen before the financial crisis.
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Contrary to the belief that hot credit markets encourage high leverage, data shows high-yield borrowers currently have leverage levels around four times, the lowest in two decades. This statistical reality contrasts sharply with gloomy market sentiment driven by anecdotal defaults, suggesting underlying strength in the asset class.
The term 'private equity' is now insufficient. The M&A market's capital base has expanded to include sovereign wealth funds and large, tech-generated family offices that invest directly or co-invest like traditional PE firms. This diversification creates a larger, more resilient pool of capital for deals.
Contrary to a slow market narrative, deal flow has sharply accelerated. Blackstone's Michael Zwadsky revealed that August 2024 was the firm's biggest investment committee month in three years, and the summer was the third most active for M&A since 2008, signaling a real inflection point for transactions.
Michael Mauboussin's research reveals a surprising trend. Despite a long period of low interest rates, non-financial corporate debt to total capital is around 15% today, significantly lower than the historical average of 26%. This suggests balance sheets are stronger than commonly perceived.
Despite headlines blaming private credit for failures like First Brands, the vast majority (over 95%) of the exposure lies with banks and in the liquid credit markets. This narrative overlooks the structural advantages and deeper diligence inherent in private deals.
The greatest systemic threat from the booming private credit market isn't excessive leverage but its heavy concentration in technology companies. A significant drop in tech enterprise value multiples could trigger a widespread event, as tech constitutes roughly half of private credit portfolios.
Despite geopolitical risk and economic uncertainty, M&A is surging because companies are executing on long-term (20-30 year) strategic repositioning plans conceived post-COVID. When capital markets open, even briefly, companies are quick to act on these dormant, high-conviction plans, ignoring near-term volatility.
The expected wave of M&A and LBOs has not materialized, leaving the deal pipeline thin. This lack of new debt supply provides a strong supportive backdrop for credit spreads, allowing the market to absorb geopolitical volatility more easily than fundamentals would otherwise suggest.
For legacy companies in declining industries, a massive, 'bet the ranch' acquisition is not an offensive growth strategy but a defensive, existential one. The primary motivation is to gain scale and avoid becoming the smallest, most vulnerable player in a consolidating market, even if it requires stretching financially.
Jeff Aronson reframes "distressed-for-control" as a private equity strategy, not a credit one. While a traditional LBO uses leverage to acquire a company, a distressed-for-control transaction achieves the same end—ownership—by deleveraging the company through a debt-to-equity conversion. The mechanism differs, but the outcome is identical.
