May 2022

Written By Jason Kania

2022 Low-Mid Market deal volume has proven somewhat resilient with deal flow increasing ~10% to 6,299 in 2022Q1 from 5,856 in 2021Q1. However, 2022Q1 deal value declined to $239 billion, down from $290 billion in 2021Q1 suggesting that valuations may to be declining and correcting from the price inflation.

Although 2021 was the most active year for M&A ($1.2 Trillion in deal value) the environment has greater uncertainty. Despite record capital raises and news funds, PE and VC invested in 53% fewer companies with sub-$100 million EVs in 2021 compared to the year prior, according to S&P Global Market Intelligence.

While deal activity currently remains robust, macro and geopolitical uncertainty have the potential to create headwinds in 2022. New geopolitical (Ukraine) and economic uncertainty, inflation, supply chain disruptions, and increased labor costs will continue to challenge operators and margins. Higher interest rates, slowing quantitative easing, the prospect of quantitative tightening will increase cost of capital and will likely suppress valuations and force buyer deal terms to become more conservative. Finally, returns from multiple arbitrage/expansion, in a rising interest rate environment is also likely to suppress multiples.

Expect continued competition as funds pursue add/bolt-on acquisitions, but keep in mind that the terms offered may not be as ‘frothy’ as we have seen in previous periods.

Contact us if and when we can be of help. In the meantime, please find a selection of resources below to support your efforts. 

KNOWLEDGE-BASE REMINDERS. Available from redforest.com/welcome for a list of resources for each phase of your search. Available to Red Forest Capital Funds Only.

M&A SPOTLIGHT select topics of interest for Red Forest Capital funds.

DEAL SPOTLIGHT within industries of interest for Red Forest Capital funds.

EVENTS

INTERESTING. More in the Industry Updates Sections below.

LIGHTER FARE

M&A, PRIVATE EQUITY & INDUSTRY UPDATES

AEROSPACE, DEFENSE, GOVERNMENT, CIVIC & SOCIAL SECTOR

Opportunities remain in Industry 4.0 transformation, commercial and military aircraft maintenance, repair, and overhaul (MRO) services and regulatory compliance with increasing complexity in accounting standards and financial reporting requirements.

AGRICULTURE & FOOD

AUTOMOTIVE & ASSEMBLY

Supply chain disruptions, raw material prices, and labor market shortages are expected to remain a challenge. Increased vehicle traffic and vehicle age are expected to drive demand for replacement parts, maintenance and repair.

B2B, CONSULTING & PROFESSIONAL SERVICES

Expect competition and opportunities in higher-margin staffing, such as IT, life sciences and healthcare.

EDUCATION, TRAINING & SKILL DEVELOPMENT

Increases in digital transformations and work from home has driven demand for up-skilling of technical competencies for employees. The tight labor market and needs of employees are causing employers to offer benefits beyond the financial - that include additional training and career development.

ENERGY, ENVIRONMENT & RELATED

Incumbents are expected to acquire ESG assets to expand green energy hubs, deliver energy transition products and to improve CAPEX discipline.

FINANCE & INSURANCE  

Insurance M&A has shifted from creating efficiency to creating capabilities and expanding distribution. Auto insurers are accelerating driver and behavior-based telematics offerings. Expect competition and opportunities in payment solutions, FinTech, InsurTech, “RegTech” in addition to loyalty program providers.

HEALTH CARE & LIFE SCIENCES

Activity varies within the industry but expect competition and opportunity in Provider Tech, Digital Therapeutics, Tech-Enabled & Value Based Care providers, Pharma-Tech and Wellness. Declining sectors include Healthcare Staffing, Home Health, Rehabilitation and Dialysis.

HOSPITALITY, TRAVEL & TOURISM

Growth is being driven by increased vaccinations, warmer weather, acceleration of ghost kitchens and virtual brands, continued to improve month-over-month. Current revenue multiples average 0.9x and range between 0.3x - 3.2x. EBITDA multiples average 5.2x and range of 1.0x - 15.4x.

INDUSTRIALS, MANUFACTURING & MATERIALS

Despite supply chain challenges and labor shortages, industrial M&A activity continues at a frenzied pace. Industrial companies are expected to continue and to use M&A to develop new capabilities, expand near shore or reshoring investments, and enter new markets. In 2021, approximately two-thirds of the deals enabled acquirers to expand into a new business or geography, or develop a capabilities like the Internet of Things (IoT), artificial intelligence, connectivity and automation. Many manufacturers, not expecting a near-term labor solution are investing in robotics and automation.

MARKETING & ADVERTISING

MEDIA & TELECOMMUNICATIONS

Media companies are buying targets that allow them to move beyond video and audio tap into the increased demand for content creation and consumption with acquisitions in gaming, fitness, betting, and location-based entertainment. Telco opportunities in integrated operators, tower and fiber assets are attracting competition from strategics.

REAL ESTATE, ENGINEERING & CONSTRUCTION

Opportunities in the construction of data centers, pharmaceutical manufacturing and distribution centers. Increases in work from home and interest in improved indoor air quality and energy efficiency is expected to specifically benefit HVACR and Mechanical, Electrical, Plumbing, and Fire (MEP/F) and specifically unified thermal moisture wrapping solutions, pre-insulated wall components, and modular and pre-fabricated construction components.

RETAIL, WHOLESALE & CONSUMER SERVICES

TECHNOLOGY

TRANSPORTATION, LOGISTICS & PACKAGING 

Transportation & Logistics M&A continues at a more moderate pace when compared to 2021. Strategics continue to represent the majority of the transactions as they aim to expand and gain market share through M&A. Expect opportunities and competition in trucking, Air & Express Delivery Services and specialty Third-Party Logistics (3PL).

WASTE MANAGEMENT & RECYCLING

Increased consumption and e-commerce has led to rising waste landfill volumes. Recycled material volumes are rising, driven by increased demand for circular economy solutions and material recovery, especially for electronics.

Unless otherwise stated, all figures are for the United States. Industry data sources are provided and often are provided by Business Valuation Resources and Aswath Damodraran of NYU

The contents of this newsletter are intended for the exclusive use of Red Forest Capital funds. Access to the Knowledge-base and to materials included in this newsletter is limited. Previous editions can be found at redforestcapital.com.

Jason Kania
Previous

July 2022
Next

April 2022