Cautious Optimism for Dealmaking in 2024

I recently returned from Davos, where the tone was decidedly subdued due to potential grey swan events on the horizon. The geopolitical environment remains tense with conflicts continuing to simmer around the world, from Ukraine to the Middle East to Africa. Voters in countries representing half of global GDP will go to the polls this year, raising the possibility of significant leadership turnover. In China, the bloom seems to be coming off the rose in the world’s second largest economy. Unknowns surrounding artificial intelligence weigh on the minds of many.

Here at home, inflation has moderated in recent months, though layoffs from Alphabet and Microsoft to Macy’s and UPS portend that the labor market is softening. While consumer confidence remains sanguine, higher for longer interest rates are bearing their weight on over-levered firms carrying a more expensive debt burden. Finally, America’s fractured political environment and the grueling general election cycle on the horizon have many leaders – in business or otherwise – on edge.

But while there are certainly some headwinds ahead, I do see an environment that will allow for differentiation and outsized returns for those ready to take calculated risks. Indeed, I am cautiously optimistic about dealmaking in 2024. The fundamentals of our economy remain resilient. Banks, corporations and consumers seem to be holding up. The Fed and the White House have managed to achieve a soft landing, perhaps reflected in this week’s decision to hold rates put. We are also beginning to see the impacts of big legislative successes of 2021 and 2022, like the infrastructure bill.

While M&A deal activity has been down in recent years, we are seeing green shoots. Philipp Freise , KKR co-head of European Private Equity, put it in perspective on a panel in Davos. He said that we need to take the drama out of 2021 dealmaking numbers, specifically that the year was a record high, and it should come as no surprise that we are resetting. In essence, we are working through the hangover. After all, corporate balance sheets are healthy and there is over $2 trillion in dry powder available that needs to be put to work by alternatives and corresponding pressure to do so from their investors.

So, where do I see opportunities this year? The infrastructure sector will continue to be fertile. The CHIPS Act, the infrastructure bill and the Inflation Reduction Act are hitting their stride, presenting opportunities in core and core plus ranging from pipelines for energy transmission, toll roads and airports to digital infrastructure, including fiber networks, towers and data centers. Digital transformation, from automation and electric vehicles spaces to shoring up the supply chain, will provide openings for deals as capital investments are required for innovation and scale. And AI will continue to garner attention and the dollars that come with it.

Corporate spins, splits and divestitures will also continue to present openings. Whether they are trying to unlock value, spin off segments to focus on the core business and, with the proceeds, pay down debt, or respond to agitation from activism, we are likely to see another year of firms selling or splitting, offering additional opportunities.

We can also expect to see significant opportunities emerge beyond our shores. In Europe and Asia, valuations are lagging behind the levels we see here. There is a need for a shakeup in Europe, as the region has been an underperformer and needs to scale up to grow and compete effectively. In Japan, the Ministry of Economy, Trade and Industry (METI) has been making policy changes to open up the country to investors and partnerships, and the once placid M&A scene is likely to become more active. The announced acquisition of iconic US Steel by Nippon Steel is a recent example. Japan also offers patient capital seeking returns. Longer term, the emergence of Africa will become a bigger story, as the continent’s population growth, which is expected to surpass China and India in the next decade, could unlock opportunities in areas such as infrastructure, manufacturing, pharmaceuticals and agriculture.

From my vantage point, 2024 is full of potential. While every cycle has its own complexion, I believe there will be opportunities are in the ups and downs if you are willing to take calculated risks in the year ahead.