Middle-market companies and private equity firms foresee an extremely strong year for the M&A market in 2022, with bullish forecasts for both deal volumes and for company valuations, according to a Citizens survey of 400 leaders at U.S. middle-market companies and private equity firms.
The survey showed an uptick in would-be sellers and continued interest from prospective buyers. Among PE firms, the majority (54%) said deal flow will increase from 2021’s record levels, while 33% said it will remain the same and 13% said they expect a decrease. In terms of valuations, half of middle-market companies expect stable valuations, while 36% anticipate higher prices. PE firms are even more positive, with 42% saying valuations will remain stable and 40% predicting higher multiples in the year ahead. The survey also found confidence in getting deals done increased among both sellers and buyers.
“We heard from companies about the challenges they expect will continue into 2022, but they also have a lot of optimism. That confidence is one of the fundamental reasons why the M&A outlook is strong even after the pace of deals in 2021,” Ralph M. Della Ratta, chairman at Citizens M&A Advisory, said.
“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 Citizens M&A Advisory, said.
Companies said COVID-19 and other economic factors, such as labor market challenges and commodity prices, are headwinds to operations, yet they still expect stable, positive performance for the year ahead. For some sectors, COVID-19 and its effects are making life much harder through depressed revenue (gaming and lodging) or steep labor/commodity challenges (transportation and logistics). For others, the pandemic is driving sales higher (healthcare, online retail).
Key Survey Findings
The survey found broad indications that high volumes and strong valuations are poised to carry on in 2022. The worries of last year (tax implications and political changes) have faded from the priority list, while the ongoing pandemic is still clearly a big factor both for operations and for bringing buyers and sellers to the marketplace.
Amid these dynamics, low interest rates and strong economic growth continue to support high valuations. The pandemic is the new normal and companies, PE firms and advisors have all adjusted to working under these conditions. Strong performers should be prepared for a seller’s market with a competitive offer process and high valuations.
The survey was conducted among U.S.-based middle-market businesses ($50 million to $1 billion in revenue) that are currently engaged in or open to M&A activity, as well as private equity firms with clients in the same revenue range. Core business sectors included healthcare, technology, industrial, consumer services, B2B services and other industries.
Business executives at 265 middle-market firms and 135 PE firms who are directly involved in decision-making related to M&A (owners/partners, CEOs, presidents and other C-level executives and directors) completed a 15-minute phone or web-based survey between November and December 2021.
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