Investment firms expect another busy year for mergers and acquisitions in 2022

U.S. investment firms closed more than 8,600 deals last year, representing a combined value of more than $1.2 trillion, according to PitchBook. This total value marked a 50% increase from 2020, when the rise of COVID-19 led to what would ultimately only be a brief pause in M&A activity.

In retrospect, the pandemic had little negative impact on deal flow. On the contrary, it inspired some business owners to sell who did not want to continue navigating turbulent economic waters alone, if at all.

COVID was just one of many factors at play influencing M&A deals. Another was concern over a potential change to capital gains tax codes under President Joe Biden’s administration that prompted some sellers to pull the trigger – although those changes never materialized.

Concerns about tax codes seem moot at this point. And the pandemic seems to be starting to recede.

Otherwise, many of the fundamentals driving M&A activity remain in play in 2022, including the tendency for older business owners to consider succession and retirement plans.

“We continue to see robust M&A volume in the United States, including here in Northeast Ohio, where the continued demographic trends of baby boomers nearing retirement are particularly relevant in providing a source solid M&A activity in the small and midsize business community as owners seek to expand ahead of an ultimate exit event or exit themselves for a strategic or private investor,” said Ryan McGovern, Cleveland-based managing director for the New York-based company. Star Mountain Capital.

Additionally, private equity firms remain flush with the dry powder, with more than $74 billion in capital raised in the past year, according to PitchBook.

However, the frenetic pace of business activity means that large chunks of these piles of cash have been put to use, prompting several companies to raise new funds.

Blue Point, for example, disclosed in December regulatory filings that it is raising an $850 million fund, Blue Point Capital Partners V. This target size is 42% larger than that of its Blue Point Capital Partners IV fund.

As mountains of capital continue to seek deals, deal multiples have, on average, increased 10 to 12 times earnings. There is variance to this, of course. Experts note that growing healthcare and software companies often fetch the highest prices as strategic buyers compete for them.

And buyout companies are willing to pay for the companies they like.

In that regard, the large seller’s market that has prevailed since the financial crisis continues to consolidate, said Stewart Kohl, co-CEO of the Cleveland co-headquarters private equity firm. The Riverside Company.

“During this period, purchase price multiples have increased significantly. Much of this increase is due to the impact of modern monetary theory and the resulting low interest rates. And this link is arithmetic,” Kohl said. “But that’s partly due to the large number of buyers with cash, the ready availability of cheap capital and a fundamental optimism among buyers. Every year I say it’s the best time I’ve seen in my 34 years of experience selling a business. . Not just in terms of price, but speed and certainty. And then the next year it’s even better.”

Most industry professionals expect 2022 to be a relatively robust year for deal flow compared to 2021, although it is unlikely to top it due to some of the unique factors previously at stake – like these tax code issues and the pandemic situation.

“It says a lot that businesses and private equity firms are seeing this pace continue,” said Jim Childs, head of Citizens M&A Advisory, in the firm’s report. M&A outlook 2022. “It reflects the level of confidence in the market. The pandemic has really disrupted the operating environment, and that creates a new value proposition for sellers and buyers.”

“If you were to take the temperature of the economy as a whole, business confidence is very strong,” said Tom Zucker, chairman of investment bank Beachwood. EdgePoint. “Our advice to many of our clients is to be decisive and when you decide (to sell), go fast. Good companies always get premium valuations at record highs, and I expect that to continue in 2022. .”