Will The Dry Powder Pressure Cooker Explode?

After a quiet 2023, there is optimism that 2024 could see a sharp rebound in M&A activity. This positivity is largely predicated on the record volumes – around USD 6 trillion (approximate to the GDP of France and the United Kingdom combined) –  of ‘dry powder’ currently held by money market funds, which is expected to drive a spate of dealmaking as interest rates begin to come down and investors chase underpriced assets over the course of the year. Major allocators, from Blackstone to Blackrock, have signalled that they expect to be active across a range of sectors including technology, infrastructure and life sciences.  

National stock exchanges in London, the EU and emerging markets have been undertaking significant reforms to listing rules – including reducing free float requirements and relaxing regulation for SPAC listings. A capital markets partner at a large US law firm emphasised to us that this is part of an effort to make it more attractive from a regulatory perspective for high growth and founder led companies to IPO and list,  and court an anticipated return of IPOs. PWC has suggested that ‘the starting bell is sounding’ for an upswing in M&A activity, and already in January, a number of significant deals have been announced, including Blackrock’s recently announced acquisition of Global Infrastructure Partners.  

In spite of this buzz, there remain a number of significant potential obstacles to any surge of activity. Dealmakers are typically reluctant to make major moves in periods of macroeconomic uncertainty, whilst fund managers have yet to recalibrate their valuations as they wait for clearer signs that the threat of recession in the United States has indeed passed. Positive signs to this effect include the 4.9% GDP growth the US registered in Q3 2023 following a long period of comparatively slow growth during the pandemic and the escalation of the war in Ukraine in early 2022; as well as promising figures on a range of indicators relating to inflation – from wage growth to  consumption. However, as recent jobs data demonstrated, the labour market remains tight, potentially impeding the efforts of the US Central Bank to bring down inflation – and interest rates shortly thereafter. History provides multiple examples of instances where victory has been declared too early and interest rates lowered, only for inflation to return with vigour, necessitating a more prolonged, more intensive return to higher rates. Though the possibility appears to be narrowing, it remains far from guaranteed at this point that inflation will be brought down sustainably whilst foregoing a recession.  

Of perhaps greater concern, however, is the growing maelstrom of political and geopolitical headwinds that appear to be gathering across the world. China’s continuing economic and industrial stagnation, coupled with the pinch on critical supply chain bottlenecks in Panama and the Red Sea have caused a spike in the price of shipping, threatening the progress that has been made in bringing down inflation with regards to energy, consumer goods and commodities. The conflict in Ukraine shows no sign of easing, and that in the Middle East perennially on the edge of spinning out into the wider region and beyond. China continues to harden its rhetoric in relation to Taiwan, which in turn recently elected its most outspokenly anti-Chinese president yet. Indeed, a record number of people worldwide will be heading to the polls to vote – leaving global policy and ambitions on matters of economics, security and climate for a huge number of global actors – including the UK, the EU, Korea, Mexico, India, and, most consequentially of all, the United States – broadly up in the air.  

Nevertheless, persistent uncertainty results in persistently favourable prices, and firms including EY Parthenon and Blackstone have publicly recognised the value of proactively taking action before the consensus view shifts and prices rise across the board. Allocators are financially well placed to take advantage of opportunities, and, logistically speaking, investors would be well advised to position themselves to act quickly should the moment arise. As part of this process, ensuring that thorough due diligence is conducted well in advance can provide firms with a better understanding of where real opportunities lie, a clearer view of the risk landscape, and the strategic agility required to get deals done before circumstances change once again. This includes – but is not limited to – running comprehensive checks on prospective targets and the senior individuals who lead them, as well as demystifying opaque or elaborate ownership structures and highlighting any red flags and potential reputational, financial and political risks associated with each deal.