Aerospace, Defense & Government Services

2021 recap

  • M&A activity in the ADG sector maintained strong momentum throughout 2021, driven in part by:
    • A high number of exits, resulting from sellers’ concerns over potential capital gains tax increases
    • Buyers’ desire to gain increased exposure to shifting priority areas in the Defense budget[1]
  • Despite slow organic growth, ADG public companies have experienced consistent increases in EBITDA multiples since 2013, separate to historically elevated levels. The valuation environment also remains highly favourable due to ample private equity dry powder and increased investor aggressiveness on valuations[2]

2022 outlook

  • New technologies, evolving business models, and increasing M&A activity[3] are likely to further accelerate the ADG sectors’ digital and operational efficiencies - with an increased emphasis on software development, security and operations, simulation-based training, and advanced weapons systems. We believe that key industry players will continue to refocus their portfolios through divestment of non-core assets while investing in emerging technologies through acquisition of innovative early-stage companies
  • Mounting geopolitical tensions and economic concerns will likely keep investments in defense at the forefront in budgets and encourage acquirer and investor interest
  • The 2022 budget allots USD 768bn for national defense programs, an increase of approximately 2% from the administration’s original budget request[4] and an increase of 1.9% from the 2021 budget[5], driving M&A interest in the sector for both strategic buyers and financial sponsors

Discover more from our ADG team here

Business & Tech-Enabled Services

2021 recap

  • Deal volumes in this sector slowed in H2 2021 after an uptick in activity in H1,[6] as many companies that were ready for a sell-side process had already sold. We believe the diminished supply of quality actionable opportunities, coupled with some buyer fatigue, drove the decrease in volume
  • Despite this decrease in volume, overall invested capital and valuations remained high.[7] This signals that investors are focusing on larger targets - driven by the desire for assets that move the needle more from a bolt-on perspective - or larger platforms, as the amount of cash available to invest continues to increase

2022 outlook

  • We believe that both private equity and strategic interest in the sector will continue in 2022:
    • Private equity interest is due to the numerous ways firms feel that they can improve value during their hold period, such as taking advantage of sector fragmentation through consolidation and improving operations through the implementation of technology. Private equity investors are also attracted to the industry because of the recurring nature of revenue in most sub-sectors – some of which are recession resistant - and the expansive range of exit opportunities due to interest from other private equity firms, for the reasons mentioned above, and strategic corporate buyers
    • Strategic buyer interest is likely to be driven by the desire to achieve additional service lines, expanded offerings, and increased geographical footprint, as buyers look to develop into a ‘one-stop’ or ‘turnkey’ solution for their customers in an increasingly competitive market
  • In our view, it will be important to observe the negative impact of potential labor shortages on business services companies’ output. We believe this may be the biggest threat to the sector in 2022 and could put pressure on the financial performance of many companies that may be considering a sale process. In turn, these companies may wait until labor conditions normalize before launching, resulting in smaller deal volumes

Discover more from our BTS team here

Consumer, Leisure & Retail

This edition, we discuss the restaurants, food and beverage sub-sector:

2021 recap

  • As a consumer driven sector, the restaurant industry has been directly impacted by pandemic-driven activity. This year brought an opportunity for the industry to recover as consumers returned to dining out – same-store sales posted their tenth straight month of positive results in December 2021[8]. Restaurants also increased menu prices by 4% – 5% this year, as operators sought to offset rising food and wage inflation rates[9]
  • M&A activity in the restaurant sector started to gain momentum in Q3 2021 as sales levels continued to rebound and finished the year on par with activity in 2020.[10] However, deal volumes are still roughly 50% below the levels seen in 2018 and 2019[11]
  • 50% of transactions were the result of strategic consolidation, particularly amongst franchisor concepts driven by lower perceived operating risk, a desire for asset-light business models, and greater finance ability
  • After more than five years with little to no restaurant IPO activity, private equity investors took to the public markets to cash-out at historically high values
  • Five restaurant companies, all backed by financial sponsors, went public in the second half of 2021 at an average valuation of 28x EV/FY22E EBITDA, well above the overall industry average,[12] demonstrating investors’ strong interest in high growth opportunities

2022 outlook

  • The year ahead is unlikely to be without challenges, with possibilities of continued supply-chain issues and further worker shortages brought on by new Covid variants. However, same-store sales are expected to continue at a strong pace in 2022, driven by expected menu price increases between 3%-4% and continued growth in travel and dining out[13] which will likely attract buyer and investor interest in the sector
  • A combination of strong post-pandemic balance sheets, easy access to capital, and a substantial number of restaurant closures (led by independent operators) is driving accelerated new unit development across the industry and especially among limited-service concepts who fared better during the height of the pandemic, which in turn, should lead to increased capital raising and M&A activity as operators seek new partners to support their next phases of growth
  • With a historically low interest rate environment, record high public market valuations, strong fundamentals and accelerating new unit development, we expect M&A and IPO activity to be robust in 2022. Already, several additional sponsor-backed companies are scheduled to debut on the public markets, including Panera Brands[14] and Coopers Hawk[15]
  • The strategic consolidation wave is also expected to continue as operators and franchisors seek to gain more scale, improve supply chain management, and leverage their corporate overheads

Discover more from our CLR team here

Education & EdTech

2021 recap

  • The sector saw an unprecedented level of deal activity in 2021, [16] stimulated by substantial market liquidity and sellers taking to market appreciated assets in response potential tax law changes [17]
  • We’ve also observed extraordinary efficiency gains from virtual deal making in 2021 – as buyers, sellers, and advisors are laser-focused on deals in process while minimizing travel and commutes. Additionally, the boom in EdTech and the efficiency gained from virtual deal making caused a shortage in lawyers, accountants, and advisors as the speed and demand of transactions outweighed supply

2022 outlook

  • Private equity firms worked through a backlog of transactions in 2021, and as a result, forward-looking pipelines are less robust for 2022. However, numerous firms have launched outbound business development efforts in the new year, which coupled with deal making efficiencies, offers a promising outlook for a strong year of M&A activity in the Education sector

  • As the world returned to schools or offices and the need for online learning reduced in 2021, EdTech stocks fell[18]. The impact of this drop on private deal valuations is still uncertain, especially given substantial liquidity in the private equity markets

Discover more from our Education team here

Industrials

2021 recap

  • M&A activity in the Industrials sector recovered strongly from 2020 levels, as corporate acquirors refocused and put increasing amounts of capital toward acquisitions[19]
  • We believe the shift towards increased M&A activity among industrial companies was driven by healthy balance sheets and leverage multiples across the whole sector, as well as a ‘target-rich environment’ provided by corporate divestiture initiatives and private sellers

2022 outlook

  • We believe that inflation and resolving lingering supply chain challenges will continue to be a key area of concern for industrial businesses and acquirors. The rising costs of labor and raw materials, coupled with issues receiving these raw materials, could delay specific deals as investors weigh up the impact on profit margins
  • However, we also believe that overall transaction activity will continue at a healthy pace in 2022, underpinned by abundant available capital and industrial balance sheet capacity[20] amid a healthy business environment

Discover more from our Industrials team here

Real Estate

2021 recap

  • The sector witnessed a record high of USD 9.5bn capital flowing through mid-November 2021, exceeding the pre-pandemic investment amount of USD 9bn in 2019.[21] We believe the emergence of unicorns, such as Lessen and Place in 2021,[22] has paved the way for more capital influx, as it attracts PE and VC interest, prepping the sector for stronger M&A activities
  • Despite the failure of Katerra and Zillow's iBuying program in 2021, investors appeared confident in the sector, with the main investment themes revolving around:
    • Digital transformation of the home closing process, from appraisal and mortgage to title, insurance, and escrow
    • Alternative solutions to make homeownership more accessible
    • Tech-enabled property and tenant management

2022 outlook

  • We anticipate deal activity to remain robust in 2022, as the real estate community continues to invest in digital transformation, driven by the strong housing market[23] and ongoing impact of the post-pandemic landscape
  • As property owners and managers reflect on the challenge of integration with too many point solutions, we believe the trend of M&A consolidation initiated by bigger platforms or legacy players is set to be big across the residential and commercial sectors

Discover more from our Real Estate team here

Technology & Software

2021 recap:

  • Buoyed by a frothy market environment, unprecedented liquidity, and attractive and emerging sector trends, 2021 was an incredible year for private equity deal activity in software, shattering records on both number of deals and dollar volume. According to PitchBook, the frenetic pace resulted in 947 deals (up 39% over 2020) with an aggregate value of USD 167bn (up 76%) in the US[24]
  • The market saw an increase in deal activity, specifically surrounding digital transformation, among other key themes. KPMG reported that 47% of CIOs say the pandemic has permanently accelerated their focus on digital transformation,[25] and Statista predicts global digital transformation spending to increase to USD 1.8tn in 2022[26]
  • In addition to the above wider sector themes, one sub-sector in which DC specializes has become especially attractive – supply chain tech. Major pandemic-related supply chain disruptions meant that investors were eager to aggressively deploy capital in cloud applications and data/analytics capabilities that increase automation and improve supply chain assessment, optimization, visibility, and monitoring. This trend can be seen in Thoma Bravo’s USD 2bn take private of QAD[27] and KKR’s minority stake investment in Koerber AG[28]

2022 outlook:

  • Given the overall sector growth, the amount of capital ready to be deployed, and the ongoing need for organizations to move legacy systems to the cloud, we do not expect private equity appetite for mid-market software companies to abate in 2022. In fact, market predictions for 2022 is that PEs will close at least 400 software transactions by year end[29]
  • Conversely, 2022 may experience headwinds with increased regulatory scrutiny, tax code and inflation uncertainty, and the compression in public market tech stock multiples. However, there are also many attractive themes in enterprise software and hundreds of billions of dollars in dry powder earmarked for the sector. We believe competition for quality deals in this sector will remain intense throughout the coming year

Discover more from our Technology & Software team here

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