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The deep freeze that fell over property technology fundraising during much of the pandemic may be coming to an end, Houlihan Lokey Managing Director Chris Gough said during a presentation at Inman Connect Tuesday afternoon.
Houlihan Lokey anticipates that mergers and acquisitions of proptech companies will gradually heat up by the end of 2023 or early 2024, ending a slowdown that by some estimates began earlier this year.
“We remain bullish about an increase in activity over the back half” of 2023 and 2024, Gough said during an afternoon Connect presentation entitled “Proptech Market Update.” “There’s too much structural capital on the sidelines.”
Proptech platforms were involved in 45 mergers and acquisitions during the first half of the year, down from 56 during the same period in 2022 and 83 in the first half of 2021, Gough said on stage, adding that investors are contributing less equity into residential companies and more into multifamily this year.
Meanwhile, $2.8 billion in growth equity was invested in proptech companies in the first half of the year, a 70 percent drop compared to the first half of 2022.
The first three months of the year appear to be the bottom of the market for investment in the segment of the market that pairs real estate with technology.
“What we really want to see from an M&A perspective is companies raising more significant [fundraising] rounds,” he said, “growing scale businesses and becoming scale target opportunities for the largest” competing companies in the space.
In 2021, the industry saw large fundraising rounds for new companies with new business models, Gough said. But “over time, those dried up,” he added.
But mergers and acquisitions of proptech companies could ramp up this year if the stock market remains stable and the Federal Reserve ends its period of aggressive rate hikes, Gough said.
If the rate hikes end, buyers and sellers should come closer to alignment over prices, ending a period of relative gridlock caused by a drop in affordability over the past 18 months.
“We are optimistic for the back half of 2023 into 2024,” he said. “We’re going to have to the point…where people are going to have to sell, they’re going to have to bring their businesses to market.”
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