US Private Equity Mid-Market Monitor: 2022 Outlook

2021 Global M&A highlights

2021 was an exceptional year – both in the ‘out of the ordinary’ sense, as the pandemic dominated our lives for a second year, and in the ‘outstanding’ sense, in the record-breaking levels of M&A.

Our Global M&A Report for 2022 examines 2021 private equity activity in each region, and deal volume and valuations in the most active sectors in 2021.

Global M&A Outlook Report: 2021 - An Exceptional Year

Read the full report here

A view from our experts

Restructuring

2021 recap

The restructuring market is cyclical and depends largely upon the state of the capital markets and availability of capital. The US restructuring market experienced a near historical low point in 2021, as measured by the default rate and distress ratio due to federal stimulus and availability of capital[1]
The US federal stimulus’ actions propelled the leverage loan market to exceed USD 1.3tn in leveraged loans outstanding in 2021,[2] and the leveraged loan default rate declined to near historic lows of 0.2% as compared to December 2011’s rate of 0.17% and June 2007’s rate of 0.15%[3]
The US leveraged loan distress ratio (measured as the share of loans priced below 80%) was below 1% as compared to 24% in March 2020[4], indicating very little distress in the market

2022 outlook

Record amounts of debt capital in the market increases the possibility of future restructuring activity. The potential catalyst for this increase remains uncertain, but could be tied to individual industry-specific factors
The Federal Reserve indicated in early 2022 that it will begin to increase rates and taper its bond purchase. [5] As a result, we expect restructuring activity to pick up from the 2021 lows, particularly with companies that have near-term maturities with highly risked or leveraged balance sheets

Private Capital

2021 recap

2021 finished with a record amount of capital raised,[6] driven by numerous billion-dollar-plus mega deals and general market enthusiasm. In 2021, USD 329.6bn was invested across 17,054 deals – twice the dollar amount and 1.5 times the deal count for the full year of 2020, which itself was the largest on record. 659 late-stage capital raises in 2021 were in rounds of USD 100m or more, with 171 in Q4 alone[7]
We expect to see more deals of this value going forward, as record amounts of uncommitted capital are available to growth equity funds and interest from crossover investors has fed the appetite for larger financing rounds. This is further supported by the slowdown in the SPAC market as more companies have been driven to raise capital in the private market instead of selling to SPACs[8]
Exits were a huge part of the story for 2021, with the strength of the IPO and M&A market creating such a frequent recycling of capital that LPs are committing more to venture capital, growth equity, and PE funds

2022 outlook

Expected headwinds next year will be the lingering pandemic overhang and increasing interest rates. These macro factors are complicated by economy-wide supply chain constraints and labor shortages. Labor costs have been somewhat offset by the new paradigm of remote work and the associated ability to hire people from anywhere. The shortage of material inputs and labor so far appears to not have materially reduced revenues due to price increases in the current inflationary environment
As we begin 2022, non-traditional investor interest and momentum will likely continue, partly due to the current strong outperformance of portfolios. At the same time, investors are flush with capital to deploy, which suggests good news for the near future, as there is likely a deeper and wider pool of capital sources available to fund and scale the next generation of innovative companies

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Asia Access

2021 recap

We saw strong recovery from Asian strategics on their appetite to conduct cross-border acquisitions, although lingering travel restrictions have meant this is not quite at pre-pandemic levels
Transactions from Japanese corporates acquiring US targets during 2021 increased by 36% in deal count and 275% by value.[9] The significant increase in deal value was led by the Technology sector, such as Hitachi’s acquisition of GlobalLogic (USD 6bn),[10] and Panasonic’s acquisition of Blue Yonder (USD 7.1bn).[11] We also saw some degree of recovery in the Industrial and Infrastructure sectors, such as Okabe’s acquisition of Vimco Manufacturing, a US-based construction material manufacturing business [12]

2022 outlook

We believe M&A activities by Asian corporates will accelerate further in 2022, as the effects of the omicron variant ease and travel restrictions become less stringent
We have already seen an uptick in transactions at the end of 2021 in the more traditional sectors: Industrials, Infrastructure, and Consumer, Leisure and Retail. We expect deal volume to increase dramatically in these sectors, as we have already seen an increase in inbound approaches to private equity firms and shareholders to complete the transactions in 2022
We also see many Asian strategics are considering divesting their overseas subsidiaries to reorganize their business portfolio - which are typically loss making or need restructuring – and moving away from the trend of ‘tolerance’ by shareholders. We believe there is room for turnaround investors to capture these opportunities as Asia strategics divest
Finally, ESG is becoming more critical for M&A in Japan and other Asian countries, as the Japanese government sets its sights on being the leader for carbon neutrality in Asia[13], coupled with increasing awareness of environmental concerns across the region. We envision that deals with elements such as renewable energy, cleantech, circular economy, carbon neutrality will increase dramatically in 2022 as a result