Last week Citizens published its annual survey consisting of 400 US middle-market company CEOs, CFOs, and Private Equity firm Principals. The survey data suggests a favourable outlook for M&A, despite economic headwinds and the global pandemic, and that volumes and valuations will remain strong in 2022 following a record-setting 2021.

One key finding stood out: almost two thirds of companies still view mergers and acquisitions as the primary growth driver over organic.

“It speaks volumes that companies and PE firms see this pace continuing. It reflects the confidence level in the market. The pandemic really disrupted the operating environment, and that creates a new value proposition for both sellers and buyers.”

Jim Childs, Head of M&A Advisory

Private equity capital

This mirrors our own analysis as set out in our Winter 2022 Capital Performance report. Our report highlighted that one of the key trends that will feature in M&A this year was private equity activity. The supply of private equity capital sits at an all-time high, with many funds still behind their ‘target deployment’ rate, due to early investment reservations and uncertainty at the beginning stages of Covid-19. 2022 will see private equity continuing to contribute to a significant proportion of deal volume, with strategies supporting both new target investments and buy and build.

The ESG effect

The second trend was ESG. 2021 saw more of a focus on ESG criteria within a transaction than ever before, and this will certainly continue into 2022 and beyond. Measuring ESG criteria will become the ‘new normal’ within investment considerations, and deal activity is expected to see increased due diligence being carved out specifically for this area.

Both of these trends have been borne out in our most recent deal, where we acted as buy-side advisor in the acquisition of a minority stake in Wood Thilsted, a global wind energy developer, by private equity firm Inflexion, via an investment made from Enterprise Fund V, Inflexion’s dedicated lower mid-market fund.

Rise of tech

Our report also predicted the continued rise in tech-related M&A deals. Technology touch points will continue to connect deal activity across varying sectors in 2022 and beyond, with premium valuations, driven by competition, set to continue for established market leaders.

The Citizens survey also made this point.

“We still see strength in healthcare and technology deals. However, nearly every sector can bring appealing opportunities. It’s really a tale of two markets. For booming sectors, it’s about securing growth and market position.”

Gavin Slader, Head of M&A, JMP (a Citizens company)

Trends continue upwards

M&A is set to continue in the public markets too. Henrik Persson, finnCap Head of Strategic Advisory Plc, predicted “there are very good grounds for expecting these patterns to continue: equity firepower and debt financing for transactions remains readily available; private equity remain hungry for deals; and opportunities will arise from the hangover from the tapering of financial stimulus and other state support. The currency advantage for overseas bidders continues, but in this respect, the extent and impact of newly-implemented national security legislation and increasing state intervention in foreign takeovers remains to be seen.

On the public M&A side, we have also been active, having recently advised on the takeover of Universe Group by PDI Software (in the technology sector). The company, which provides petrol forecourt, retail payments and loyalty and enterprise management software, was acquired for £33m in cash, more than double its market value and very close to the highest price it had ever traded on the market.

As noted by John Farrugia, Managing Partner of finnCap Cavendish, the debate within the UK deal community is what transaction activity will look like in 2022. Despite the pandemic wearing on, the ingredients of capital availability, improving market conditions and financial market enthusiasm, coupled with dealmaking appetite (whether stable or distressed) look set to contribute to a continuation of the deal frenzy.