*Source: GF Data Feb 2022 M&A Report – Private equity-sponsored M&A transactions – $10 to $250 million enterprise value.
2021 acquisition deal volumes and values of Lower Middle Market companies were a continuation of the momentum begun in 4Q2020, resulting in record deal volume and elevated deal pricing in 2021, especially for high quality businesses. Deal volumes increased 37% and average deal multiples increased from a low of 6.6X EBITDA in 3Q2020 to a high of 7.5X in 4Q2021. Over 70% of the 2021 transactions were add-ons to existing platforms.
The primary motivation for sellers was the proposed Biden Tax Plan which failed passage in the U.S. Congress. Combining this with the accompanying failure of the $3.5 Trillion Build Back Better Legislation, the fears of a Federal Government “tax and spend” tsunami subsided, further stimulating the M&A market. With adequate masks, testing and vaccines, COVID became a manageable issue as public efficacy increased, deaths and hospitalizations declined, and businesses prospered while also managing through supply chain obstacles and work force vacancies.
If not for a shortage of due diligence capacity in late 2021, 4Q2021 closed deal volume could have finished even stronger. Many late 2021 deal closings were delayed to 1Q2022, allowing for a jump start in 2022.
While the general M&A market was experiencing a robust 2021, private equity firms were monetizing portfolio investments, raising new investment funding, or both. Pitchbook predicted that US private equity fundraising would surpass $300 Billion in 2021, adding to the estimated $1 Trillion of “dry powder” currently in place. This allowed PE fund managers to write larger deal checks at record EBITDA levels, especially in the secondary PE transaction market.
Deal momentum from late 2021 has carried over into 2022 so far, based on the first several months of activity. Buyer and seller interests continue to be elevated. Quality sellers attract considerable investor interest fueled by an abundance of investible dry powder and low interest rates. While it would be easy to get caught up in the M&A excitement, there are economic factors and world events that are of concern to the seasoned investor.
While we expect substantial M&A activity in 2022, the top concerns of 2021 – tax increase, COVID, supply chain and labor shortages – have changed. Inflation, fuel prices, rising interest rates, mid-term elections and the Ukraine invasion could alter the momentum of the M&A markets versus the past five calendar quarters.