Hodes Weill: Expect to see M&A momentum

The New York-based capital advisory firm believes an increase in corporate transactions is in the offing, despite pressure on sale multiples.

Hodes Weill believes the private real estate market should soon expect to witness an increase in corporate transactions.

The New York-based firm said in its 2022 M&A Market Review, shared first with PERE, it expected to see more mergers and acquisitions as 2023 gets under way.

The firm said 2022 marked the second-busiest year since 2018, with 28 deals announced, dominated by sales of boutique and mid-cap managers – firms with less than $7 billion of assets under management. These accounted for more than 50 percent of the transactions.

Doug Weill, founder at Hodes Weill, said: “As the market resets, we expect this momentum to continue as stalled transactions are restarted, and possibly even accelerate as the year progresses – especially if LP allocations to funds and investment vehicles grow.”

Hodes Weill pointed to four themes to watch in 2023. First, the firm expected continued interest from minority stake investors and strategic investors seeking entry to the private real estate market.

Weill: softer valuations for managers are likely but should not impede increasing M&A activity

Second, the adviser said ‘non-cycle’ catalysts such as succession planning and strategic opportunities to enhance growth would be a growth driver.

Third, it expected ‘softer’ valuations because of today’s market uncertainty, decreased trading multiples for public managers and a generally more challenging fundraising environment for sellers sitting outside of so-called ‘top quartile’ metrics.

Weill explained: “The market remains highly fragmented with over 2,000 managers globally, and it is increasingly hard for boutique managers to compete for capital allocations, in a market where 10 to 15 managers continue to raise 50 percent of the capital.”

Fourthly, Hodes Weill expected earnouts to remain a significant part of any transaction, where managers are incentivized by compensation aligned to ‘double digit-plus’ growth. Weill said: “For managers concerned with valuations that do not match up with their growth plans, we expect to see a greater portion of the consideration deferred in the form of multi-year earnouts and staged buy-ins.”

“Many of the drivers for transaction activity remain intact and are potentially even more relevant in the current market environment,” Weill said.