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2021 M&A Overview and 2022 M&A Outlook

2021 M&A Deal Activity – In the past year, deal making in the middle market set a historic pace. Private Equity firms closed an estimated 8,624 deals for a combined $1.2 trillion—around a 50% increase from previous annual records for deal value. As a result, many industries experienced increased competition for deals, and multiples returned to levels equal to or higher than in 2019. Low interest rates were a key factor in driving the record-breaking pace. Some look at potential policy changes on the horizon, including interest-rate increases, as a sign that deal activity could slow down, while others look to the cash piles many companies amassed early on during the COVID-19 pandemic as a sign that 2022 will be another strong year for M&A activity.

Valuations – Valuations in 2021 hit heights that have not been seen in well over ten. However, with the increase in buying opportunities and limited resources, its expected that buyers will begin exercising more restraint and valuation discipline in 2022.

Rep & Warranty Insurance – Representation and warranty insurance (“RWI”) continues to play a prominent role in the M&A deal process. According to the most recent American Bar Association M&A Deal Points Study, the use of RWI has jumped from 29% of deals to 65% of deals in the last five years. Diligence areas of focus for RWI carriers in 2021 centered on data security, environmental matters and compliance with COVID-19 regulations, and we expect those focuses to remain. In the early stages of the pandemic, RWI carriers included broad COVID-related exclusions in their policies, but these have generally been tailored to the individual company’s COVID-related risks.

Add-Ons/Exits – Last year continued the upward trend in the use of add-on investments. According to a report from PitchBook, add-ons as proportion of the number of total US buyouts reached an all-time high of 72.8%. We expect to see a continuation of this aggressive approach to add-on acquisitions in 2022, as many buyers devote significant resources to buy-and-build strategies to create value. Firms are using the flood of add-ons to help blend-down the sky-high EV/EBITDA multiples, which had a median in the private equity sector of about 13.7x while the S&P 500 had a median of 16.8x. With a general consensus that multiples will shrink—or at least stay put—in the coming years, firms are becoming more aggressive in their pursuit of inorganic growth and continue to add on well into their holding periods. Additionally, the median holding period for private equity assets experienced an uptick, reaching the 5.0 year mark again after the past two years of sub-five median holding times. US exits in 2021 shattered previous records for both number of exits (1,731 US Companies) and total value ($854.3 billion). These numbers were affected by the addition of exits meant for 2020 but put off until there was less uncertainty in the market, and deals closed in 2021, instead of 2022, for tax-related reasons. 

Increased Focus on Inorganic Growth – Firms are becoming more focused on inorganic growth. Rising valuations have motivated firms to add value through buy-and-build strategies, both through add-on acquisitions and aggregation of multiple small companies to generate scale.

Economic Slowdown? –  Headwinds are forming in 2022. Projected interest rate increases, antitrust and foreign investment regulations, new COVID-19 variants and potential tax law changes may cause certain businesses to taper spending and expansion plans. Nonetheless, high-yield credit will remain attractive to investors, keeping capital available to private equity firms, even as the Federal Reserve hikes interest rates.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 56
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About this Author

Michael E. Hollingsworth II Partner Atlanta Nelson Mullins
Partner

Michael is co-head of the firm’s Mergers & Acquisitions Group and its Investment Management Group. He focuses on middle-market corporate transactions, including mergers, acquisitions, divestitures, and joint ventures. He also serves on the firm's Executive Committee, the governing body of seven partners who oversee firm standing committees, strategic initiatives, and firm operations.

404-322-6080
Katelyn Fredericks Partner Atlanta Nelson Mullins
Partner

In choosing a corporate attorney, client feedback often ranks two qualities at the top of the list: practicality and business savvy. According to her clients, Katelyn is both of these things and more. With a decade of practice behind her, Katelyn is an experienced corporate attorney who helps individuals and businesses achieve their transactional goals. A recipient of the 2018 Emerging Leaders Award from M&A Advisor, she is known for her responsive and practical way of doing business. Katelyn’s clients remark upon her straightforward approach that is customized to...

404-322-6214
Stephen Poydasheff Associate Atlanta Nelson & Mullins
Associate

Stephen focuses his practice in the areas of Mergers and Acquisitions and general corporate matters. Stephen was a Summer Associate at Nelson Mullins Riley & Scarborough LLP during 2020 as well as a Summer Clerk at a Georgia-based law firm in 2019. 

404-322-6252
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