Gables did not respond to multiple requests for comment on the sale process, or the reasons it was put on hold. But it’s far from the only company to suffer this outcome in recent weeks.

These abandoned sale processes create challenges for everyone in the dealmaking chain. However, one group feeling the impact most keenly is direct lenders, who have amassed huge amounts of cash in recent years only to find there are very few places to invest it.

“We're feeling the same pains as all our other peers, which is just a lack of M&A, a lack of exciting assets, and a lot of money chasing the few quality assets that there are,” said the head of private credit origination at a large asset manager. 

Halfway house

While some sponsors have abandoned sale efforts entirely, others have settled for stopgap solutions. 

Earlier this year, private equity firm Waud Capital Partners explored a potential sale for its portfolio company Health & Safety Institute, which it has owned since 2019. But it didn’t manage to sell the company outright.

Ultimately, the sponsor brought on Neuberger Berman as a minority shareholder and lender. Both firms declined to comment for this article, and HSI itself did not respond to a request for comment. 

This outcome is more positive than a completely failed sale process. For example, one source noted that even a minority sale requires a new valuation, which sponsors can then use to mark the asset. But it still means a lot of wasted time for market participants.

According to our reporting, direct lenders and investment banks alike were treating HSI as an active origination opportunity, even after the auction went quiet (failed sales often mean companies must address looming debt maturities). That opportunity is now off the table.

Dealmaking doldrums 

With a few interruptions, this M&A paralysis has been the prevailing narrative since late last year. 

In the third quarter of 2023, the total deal value of domestic US private equity activity dipped below $200bn for the first time since early 2020, when the pandemic shut markets worldwide, according to PitchBook. 

Alongside new deal volume, valuations have also plummeted. Last quarter, private equity exit values fell nearly 41%, according to PitchBook — their lowest quarterly level since the 2008 financial crisis, if you ignore the Covid slump.

Debt financing has also become more expensive and leverage ratios have contracted, making buyouts less cost-effective. In this environment, sponsors are holding onto assets for longer and praying for two things: for valuations to come back up, and for the cost of debt, which has risen sharply alongside base rates, to go back down. 

This is effectively causing a stalemate between sellers and bidders. 

“Valuations have come down, but sellers still have the anchor from a year or two ago, when valuations were much higher,” a private equity associate told 9fin. “So when they're looking to sell, they're still looking to sell at those levels.” 

“For buyers, there's less leverage available, as interest rates are much higher. There's a valuation disconnect a lot of the time, which leads to processes just breaking and trades not happening.”

Simmer down

Another recent example of a broken sale process is Audax Private Equity’s efforts to sell its portfolio company FDH Aero. Back in August, 9fin reported that the sponsor had hired investment banks including Jefferies to explore a potential sale. 

At the time, one source noted that “we’re starting to get back to the leading edge of the cycle for aerospace.” Fast forward just three months, and we reported that the sale process had failed to take off. 

This is another good example of how the dealmaking doldrums are impacting market psychology, especially among sellside advisors trying to close the year on a high. 

“Bankers have been desperate to try to salvage the year,” said a managing director at a private credit firm. “They got a little ahead of themselves in talking sponsors into trying to get something done. There were a lot of those kinds of false starts in late summer into September.”

These false starts have significantly thinned out the origination pipeline, despite many of the companies involved in these processes being in decent shape.

“It doesn't mean that companies are crapping out,” said the managing director. “That part of the story is actually quite good, thankfully. It's just that multiple compression is very real, and it's hard to recover from that.”

It’s a cliché that in M&A, the next big wave of new business is perpetually just around the corner. Even so, as private credit professionals look to the new year, they’re anticipating an onslaught of new deal activity as PE firms are forced to return capital or reckon with debt maturities. 

In the meantime, there’s always add-on activity to buoy origination volumes — although that too may be hindered, as regulators take a closer look at private equity roll-up strategies. 

“Private equity firms at some point will begin selling their crown jewel assets,” said the origination head we quoted earlier. “You can only sit on them for for so long.”