September 2022

Written By Jason Kania

We’d like to formally welcome the newest cohort of search funds, along with all of the newborns and partners that have joined in the past year. We hope you and your families enjoyed a restful summer and join us in welcoming the fall - which is also one of the busiest seasons for M&A!

That said, economic volatility, uncertainty and inflation should create opportunities for you, especially as business owners become more motivated to exit. According to the 2022Q1 Middle Market Business Owners Survey conducted by Capstone Partners, owners’ economic uncertainty increased ~6% quarter-over-quarter (QoQ) with ~90% citing rising inflation as the leading issue. Among CEOs that experienced economic uncertainty, nearly ~50% identified additional capital as a key recovery tactic and ~30% pointed to investment as a viable source of capital. Owners have continued to focus on the immediate revitalization of business, prioritizing resources that align with their most prominent challenges. It’s hard to ignore investor confidence and the surrounding a near-term economic downturn. However, there are opportunities to acquire at more favorable prices and emerge as winners!

And, if Matt or I can help you make sense of all that is going on and any impacts to your search, please contact us. In the meantime, please find a selection of resources below to support your efforts. 

SELECT TOPICS with an emphasis on Search Funds, Small Business and Private Equity

EVENTS *Virtual | Search Fund Events in Bold

INTERESTING and general business related topics

LIGHTER FARE

M&A & INDUSTRY UPDATES

GENERAL M&A

AEROSPACE, DEFENSE, GOVERNMENT, CIVIC & SOCIAL SECTOR activity remains subdued, but activity in Cyber, AI, and unmanned technologies remain strong. Companies are reorganizing and recovering from COVID, which had resulted in social distancing, remote working, and a general slow down of commercial activities. Digital innovation is expected to be the key for revival and growth. Companies focusing on digital innovation could benefit, particularly those companies which prioritize greater efficiency in their engineering, manufacturing, and supply chain processes by executing digital solutions. Moreover, the increased use of digital technologies such as additive manufacturing will contribute positively to cost effectiveness and waste reduction.

AGRICULTURE & FOOD is recovering from COVID which has delayed the seasonal labor, disrupted supply chains, and restricted access to traditional marketing outlets. Consumers reinforced their preferences for organic food, sustainability, and health & wellness activities, after the initial shock to the food supply chain. Food and supply chain stability are a primary focus highlighting the importance of agricultural markets. Output, farming operations, and trade volumes will need to increase, to meet the food demands of a rising population according to Food and Agriculture Organization (FAO) and World Bank.

AUTOMOTIVE & ASSEMBLY saw meaningful decreases in 2022Q2 as the Fed rate increased in addition to rising input, material costs, and supply chain fulfillment challenges. Manufacturers continue to fight for market share in the growing electrical vehicle market, which should provide substantial tailwinds for the industry in coming years. 2022Q2 M&A saw a decrease in transaction volume compared to 2022Q1. Automotive retail continued to remain the most active sector, accounting for 65% of transaction volume. Automotive Parts & Equipment showed strong sector strength as well recording ~15% of transaction volume in 2022Q2.

B2B, CONSULTING & PROFESSIONAL SERVICES industry is being impacted by continuous uncertainty, new risks, and digital disruptions. Cyber security is still a major concern for the business services industry. In addition to that, the risks faced by the business services industry has increased significantly because of supply chain disruption, commodity price volatility, and a shortage of skilled labor. The Great Resignation is expected to increase the hiring challenges in 2022. The professional and business services industry had the highest turnover rate among office-centric industries which is expected to increase in 2022. Digital technologies are projected to help businesses increase both productivity and income. Several multinational companies in the business services industry are still in the early phases of digital and cloud transformations. The total number of deals in the business services industry is forecasted to decrease in 2022 according to Harris Williams. However, it is expected that deal volume would increase in 2022 due to several positive factors including sufficient capital, substantial debt capacity and strong business performance.

EDUCATION, TRAINING & SKILL DEVELOPMENT trailing twelve months (TTM) M&A value grew by more than 50% and 40% of deals were financed by private equity, venture capital, or some other investment firm, according to 2022H1 Education M&A from BerkeyNoyes. The rate of deals in the childcare services and higher-ed media and tech spaces increased, but the number of deals in professional training technology, higher-ed institutions, and K-20 services fell. Deals involving K-12 institutions remained stable. The report showed a mixed picture for market activity in various segments where K-12 media and tech surpassed professional training services as the industry’s most active segment.

ENERGY, POWER, UTILITIES & RELATED slower deal activity in 2022H1; however, the last twelve months still showed an increase in deal value and volume over the previous twelve months. The industry as a whole, has been dealing with continuing labor shortages, supply chain disruption, and inflation. Institutional capital remains shy about reentering the oil and gas markets, however private companies have been taking advantage of the higher prices and are look at acquisitions with their available free cash and solid balance sheets. As a result, some larger companies have been looking to expand their networks by acquiring smaller players rather than building new pipelines. A significant portion of M&A activity is expected to focus on solar, wind and related energy-producing assets. The fast-improving technology, operating and financial efficiencies, and low-cost of capital are some of the factors contributing to another year of strong M&A activity. These deals will accelerate the renewable energy sector’s drive to achieve a lower-carbon and sustainable future. The percentage of renewable energy M&A deals as a percent of all energy sector deals is expected to increase in 2022. M&A activity in the fossil fuels market is expected to remain weak in this year.

FINANCE & INSURANCE  M&A fell in 2022Q2 across capital markets, banking and insurance. Transaction volume fell ~30% percent and deal value dropped 15% according to KPMG. Increases in interest rates and inflation primarily drove the decline. The Fed is expected to increase interest rates again by 75bps to control inflation. Conditions for the insurance M&A environment have shifted rapidly and the future remains uncertain. Life and annuity (L&A) led the underwriter field in number of 2021 M&A deals, as sustained low interest rates hobbled profitability of interest-rate-sensitive products and numerous insurers pursued inorganic sources of growth. Property and casualty (P&C) sector deal volume declined by 17% decrease in deal volume YoY, which is likely due to increased interest rates and a demand-supply imbalance from a lack of attractive acquisition targets. The broker sector rebounded with a 45% YoY increase in deal volume and 170% and 136% deal value, respectively and according to Deloitte’s 2022 Insurance M&A Outlook.

HEALTH CARE & LIFE SCIENCES continues to grow at a rapid pace and new scientific & operational opportunities are emerging. Small and medium businesses in the healthcare and life sciences industry were obliged to undergo quick transformations because of the pandemic. A tight labor market will continue to provide challenges in retaining talent. Healthcare is addressing the growing importance of disparities in healthcare, sustainability, and the environment. Deals involving innovative technology or alternative care options could increase efficiencies and counter staff shortages. Companies continue to improve its employee’s experience, along with rapidly scaling virtual health services for patients, and forming partnerships to create the necessary vaccines for treatments, and supplies. Long-term care and physician medical groups and alternative care such as home health, also posted significant transaction volume in 2022H1.

HOSPITALITY, TRAVEL & TOURISM revenues could recover in 2022, given air travel volume is currently higher than the low levels of 2020. While leisure travel has bounced back with intense demand, the recovery for business travel has been slower and far less robust — thanks in part to companies strategically cutting back on travel spending or maintaining the travel restrictions implemented during COVID. Some business travel spending that was derailed by COVID may never come back, before 2026, according to an August report by the Global Business Travel Association. Continued travel restrictions are even more common at larger companies, with 45% continuing to have restrictive policies toward business travel, compared to just 24% of smaller companies, despite 73% of executives at large companies saying business travel is essential. In fact, Google is reportedly telling employees to limit corporate travel, while Microsoft is asking its own workers to examine their travel expenses.

INDUSTRIALS, MANUFACTURING & MATERIALS M&A has been hindered by inflation, freight costs, and raw material price volatility. Investors look at commodities like metals as hedges against inflation, and confidence in the Fed’s policies. However, many companies are sitting on cash, exploring acquisitions and divestitures, all of which are potential for increased deal activity. Focus on supply chain will continue to be top of mind. Companies will move to M&A activity as they seek to mitigate risks to supply chains, protect margins, and realign portfolios. Many business owners that have successfully navigated COVID and a recovery are considering a sale now while valuations remain high. (2022Q2 Commercial and Industrial Sector Update from Wilcox)

MARKETING & ADVERTISING transactions declined to 125 in Q1 and down from 139 YoY and average deal value is $195MM in Q2, up from $56 million in Q1. Expansion in digital advertising, ad spending saw record growth in 2021, with significant growth expected in display & search ad spending. In 2022, over 90% of all digital display ad dollars will transact programmatically and marketers are now putting more than 50% of their media budget into advertising. (Greenwich Capital Group)

MEDIA & TELECOMMUNICATIONS helped maintain productivity, efficiency, and connectivity during COVID. The demand for streaming services, social media, gaming, and other forms of online entertainment grew significantly during COVID, which increased the valuations of media companies. Investment in advanced telecommunication technologies and market competitiveness are driving growth. M&A activity is expected to remain vibrant, with PE increasing their investment or acquiring divested technological non-core assets. Companies are expected to pursue digital transformation initiatives through acquisitions and investments in tech-enabled assets. (202207 TMT M&A Update from Canaccord Genuity)

REAL ESTATE, CONSTRUCTION & ENGINEERING companies have enjoyed a brighter deal environment with available cash, investments in infrastructure and the Jobs Act. Continued supply chain issues and concerns of increasing interest rates have led to a decrease in housing starts, even though pent up demand for housing remains. Despite rising interest rates, supply chain issues and slowing economic activity, deal activity has returned to pre-COVID levels.

RETAIL, CONSUMER SERVICES, TRADE & WHOLESALE

TECHNOLOGY deal volume overall is also higher versus 2021, with 3,506 total tech M&A transactions occurring in the first half of this year. Despite inflation and higher interest rates, strategic and financial acquisition is being driven by $1T on investors’ balance sheets, and by strong underlying business growth that is prompting company’s to continue to invest for growth.

TRANSPORTATION, LOGISTICS & PACKAGING deal value increased over the last twelve months with increases in trucking, passenger air and shipping. M&A activity is expected to remain high as companies combat challenges with COVID variants, supply chain disruptions and material shortages. Trucking M&A activity is strong and valuations are high as companies seek to solve labor and equipment issues through acquisitions. Technology and digitization continue to be a focus to increase efficiencies, mitigate delays and allowing for improved fleet management and decision making.

WASTE MANAGEMENT & RECYCLING has continued to benefit from consistent growth in waste volume, manufacturing activity, and increased demand for recycled materials. Strong M&A activity is continuing as buyers remain focused on the recurring and essential services. Consumption remains high despite inflation which has a direct and positive correlation with hazardous and non-hazardous waste. Hazardous waste volumes are expected to benefit from utility construction growth paired with rising industrial production. Utility construction which includes water, sewage, or power supply infrastructure. Existing and new near or onshore manufacturing activity will also bolster hazardous waste removal demand as some forms of industrial waste cannot be processed alongside non-hazardous streams. Expect competition from strategics as they aim to fuel long-term growth and to increase capital expenditure on material recovery facilities (MRFs) and renewable natural gas (RNG) facilities. Companies that invest in plastic recycling are expected to benefit from environmentally conscious consumption and business practices. MRFs and recycled plastic providers are expected to benefit from continued demand in packaging as the material offers thermal insulation, shock absorption for fragile items, and moisture resistance while benefitting the environment. In addition, plastics are increasingly being used in other sectors such as Automotive, Textiles, Electrical and Electronics, and Building & Construction. Food & Beverage accounted for more than two-thirds of post-consumer recycled (PCR) consumption in 2021 and brands continue to invest in more circular value chains to reduce waste.

Jason Kania
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