Wall Street took a $6.4 trillion hit on Monday and, in the days since, commentators have been weighing in with concerns over the health of the U.S. economy. Did the Fed wait too long to lower interest rates? Could the country be headed into recession? Is an AI bubble bursting?
Amidst the upheaval in the public markets, entrepreneurs might be wondering about impacts on mergers and acquisitions (M&A). Could we be headed for more turbulence in the private markets? Or can we follow advice from the likes of legendary investor Warren Buffet and just ignore it?
In other words, how should entrepreneurs interpret stock market fluctuations as they prepare to sell or recapitalize a business? As a recovered lawyer, I will fall back on my favorite answer from my law firm days: “It depends.”
For example, when the markets hit the skids in 2008, it was due to fundamental financial infrastructural issues. Our banks were at risk.
When the banking system is in dire jeopardy, credit markets seize up and the private deal market almost inevitably comes to a standstill as well. That’s precisely what we saw during the Great Recession. We heard from several private equity funds at the time that they were simply “pencils down” until things settled.
Compare that with today, and we come to a vastly different conclusion. Recent volatility has been primarily driven by hedge fund unwinding of various trades. Rather than facing potential (and actual) bank failures as we did in 2008, we’re suffering through a more isolated event. Hedge funds’ trading is highly unlikely to affect the private markets much, if at all.
At Class VI, we engage in dozens of conversations with private equity funds every day. So far, we aren’t hearing concerns surrounding the state of the public markets. In fact, with the expectation of Fed rate cuts in September and December—cuts that most experts now deem highly likely to occur—financing costs will soon drop, which should energize private equity buyers.
The takeaway? Just as we’ve advised clients to “sit tight” with their personal investment portfolios, we encourage those in or entering the private M&A markets to keep calm and carry on.
2024 has presented us with a challenging deal environment in many ways, with more thorough due diligence than ever and an obsessive focus among buyers on business performance all the way to closing day. This week’s stock market gyrations, by comparison, are merely background noise.
Taking your business to market is stressful enough. About this news cycle, there is no need for panic.
AUTHORED BY:
Chris Younger | CEO | Class VI Securities, LLC | Class VI Family Office, LLC
Chris co-founded Class VI in 2005 with a mission to Enable the Entrepreneurial Spirit. Sharing a passion for what entrepreneurs mean to our community, Chris and his business partner David Tolson felt they could do a better job for business owners and have had a great time helping clients ever since.
Prior to Class VI, Chris spent more than 20 years gaining experience in executive management, marketing, sales, law, and mergers and acquisitions.
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