This is Scott Becker with the Becker Private Equity Podcast. We're today to be visiting with one of our most listened to guests. We're talking to Matt Wolf. Matt, a senior leader in RSM, who does a wonderful job of thinking through what's going on the market, and the business of private equity, and a lot more evaluations and everything else. Matt, what are you seeing in the private equity market today? Is it getting busier, smaller deals, bigger deals, slow, fast? What are you seeing out there? And probably more importantly, what do you expect in 2024?

Yeah, thanks, Scott. Great to be on, as always. I think we continue to see the dust settle in the M&A market. I don't know that we can quite say we've turned a corner yet. I think a lot of sponsors, both from the private equity, private credit side, bankers are getting used to this interest rate environment and are coming to terms with the higher for longer interest rate environment, whether the interest rates are low, high, moderate, whatever, once there's this expectation of stability, that helps buttress the deal environment, right? Investors are more willing to make deals when we have a better expectation of what that future interest rate environment will be. And I think we're getting there. You talk about 2024, our call is for probably 100-125 basis point reduction over the calendar year '24, but probably not starting until the second half of the year. We've seen some really strong economic data in the real economy that suggests there's really not a reason, at least not yet, for the Federal Reserve to lower rates. Some other economists, some other banks are looking at earlier in 2024, first half or so, maybe second quarter or even late first quarter, looking at some reductions.

We just don't see that yet. Of course, this is a very data-driven Fed, so we'll have to wait for the data to know more. But at least based on what we watch, what we look at, our economic team, RSM, we're expecting rate cuts in the back half of 2024. But this idea of hire for longer is taking root across the deal making spectrum, private equity, private credit bankers, even founders selling their businesses. So we're starting to see a return of deal making. We had Ken Mollis said yesterday, the day before, that their backlog is very strong. They're expecting a good year in 2024. We've heard some others from some other bank or similar stories from other bankers that they expect an uptick in the deal environment that 2024 should be maybe back to, quote-unquote, normal, not 2021, but not 2023 levels, something more like 2018, 2019, despite the high interest rates. Because again, really ultimately interest rates: high, low, moderate, whatever, what investors are waiting for is some stability in those rates. I think they're finally coming to terms with that.

But I think your point is so right, because there's very much the sense that if rates are coming down in a hurry, we're certainly getting closer to where they stop going up, and then it becomes all around predictions of when they're going to come down. And that's what we're seeing out there. Fair statement?

Yeah, and I think what we aren't seeing is we aren't seeing expectations of the Fed fund going back down towards zero or close to zero, I should say, which we heard from people, we heard from sponsors that, Yeah, we'll be done with this cycle, and then we'll get back to low, like 2021 type interest rate environment. And we never really thought that was the case. And now a lot of investor sponsors are their seeing it too, that, yes, there might be some interest rate cuts, but we're probably going to end up at a Fed funds rate closer to the historical norm, which is around 300, 325 basis points lower than it is now by 100 basis points or so, but certainly higher than it was in the decade or so leading up to and through the pandemic.

Thank you. In terms of just generally mid-market funds, huge funds, where are you seeing more activity now as we start to head toward the end of the year? Where are you seeing more activity? Is it small deals, big deals, or no deals? What are you trying to say?

Yeah, the very dead middle of the market remains struggling to recover relative to the other ends, right? We've seen a lot of those middle-market players move down, stream to smaller deals than they would typically otherwise look at just because they're a little bit easier to finance. They think there might still be some more quality assets down in that size that they just hadn't looked at before. And then certainly the big deals, we continue to see a lot of those partially driven because the large mega funds, despite some missteps, are generally having an easier time fundraising. They're able to deploy capital, they're able to leverage some certain scale advantages that they have at the upper end of the market. And so we've seen those two sectors, the lower end and the upper end, really rebound probably the fastest. That isn't to say that the middle of the market hasn't been or has been stagnant. It hasn't. It has been improving, but probably not as quickly as those other two ends of the spectrum.

No, fascinating. Thank you very, very much. Matt, anything else you want to share with the listeners today about the private equity market and what you expect?

Yeah, I think we'll continue to see focuses and narrow specializations of funds as a way to continue to raise capital. I think we're going to see hold periods continue to extend back to maybe where they were about 10 years ago, right? That five to seven-year hold is going to become normal because despite the uptick and deal environment, and as we're talking about everybody getting used to a higher for longer rate environment, the fact remains that private equity's ability to deliver returns through multiple arbitrage, meaning buying a bunch of companies that say 5X and selling it at 12X or whatever, those opportunities are going to be much more limited. Going forward, the way sponsors are going to have to primarily focus to drive those returns is around investing in operational improvements and scaling businesses. And that's a different skill set. Not to say that there isn't room for multiple arbitrage and financial engineering to drive returns. There certainly is and there always will be in private markets. But going forward, we're going to see increased focus on operational improvements and that will lead to more specialized funds, more specialized fundraising, more niche investment thesis.

And that's fascinating, isn't it? You see people move away from being generalists into very niche driven things and having a reason for being a reason for a special vertical, special expertise, special knowledge that makes them better investors in the area. We see this so much what you're talking about that. Thank you so much. Matt Wolf, as always, thank you for joining us on the Becker Private Equity Podcast. A brilliant leader at RSM. It's always great to visit with you. It's just a pleasure. Thank you very, very much.

Thank you, Scott.