The outlook for mergers and acquisitions (M&A) remains modest as tighter economic conditions lead to more caution, according to the latest HLB Mann Judd Australian M&A report.

Analyzing the Australian M&A market, including deal trends, industry dynamics and valuations, the firm found that the reduced activity present in 2022. and 2023, continued in 2024.

Namely, the total number of deals fell further to 945 in FY2024, down from 1,190 and 1,487 in the previous two years.

Commenting on the data, Nicholas Guest, underwriting and advisory partner at HLB Mann Judd Sydney, said: “The reduced number of deals across all quarters in FY2024 compared to FY2023 and FY2022 shows that investors continue to take a cautious approach when meeting supplier price expectations in light of high interest rates, elevated inflation and ongoing geopolitical tensions.

"As a result, some transactions continue to be held up as merchants prioritize expanding their operating cash line, delaying deals until market conditions improve and pursuing those transactions that offer clear value-add."

However, Gost highlighted the large increase in the number of institutional investors, especially from the pension sector, who are actively looking for investment opportunities, with environmental green sectors in the first place for many.

"Overall, there is a growing appetite for deals, but the market is still dealing with economic uncertainty and geopolitical risk," Guest said.

Private investors are said to be more cautious about M&A opportunities in the Australian SME segment.

"We expect private investors to prioritize investments in ventures with strong business fundamentals, such as stable earnings and clear value propositions, to optimize their portfolios amid persistently high interest rates and inflationary pressures," Guest said.

Interestingly, the report revealed that large enterprises with available funding are taking advantage of the opportunity to pursue mergers and acquisitions that were previously thought to be overvalued and unattainable.

Namely, the year ending June 30, 2024 saw an increase in the number of deals exceeding $1 billion, with 26 deals compared to nine deals in the previous year and 15 deals in the 2021-2022 financial year.

The average transaction value increased to $121 million in FY23-24, up from $89 million in FY22-23.

According to Guest, the trend may also reflect deals prioritizing deals with clear strategic advantages and long-term potential over short-term investments.

Elaborating on deal activity in FY23-24, the report revealed that Q1 and Q2 had a similar number of deals – 268 and 264 respectively – possibly due to the drive to complete transactions before the end of the calendar year.

The number fell slightly in the third and fourth quarters – 205 and 208 respectively – while the overall average ratio achieved for completed deals fell from 10.3 times in FY22–23 to 9.3 times in FY23–24.

According to Guest, the government's commitment to meet net zero targets by 2050. could prove promising, potentially boosting activity within energy transition infrastructures, including the energy storage and distribution sectors, particularly among government-backed fund managers.

“This trend was evident in FY22-23 when the Clean Energy Finance Corporation, a government-backed fund, invested in 50 new and follow-on transactions, committing a total of $1.9 billion to initiatives aimed at reducing emissions in the Australian economy. he said.