Aerospace, Defense & Government Services

  • After a nearly six-month continuing resolution, the FY22 US Department of Defense (DoD) budget has finally been passed by Congress and signed by the President.[1]The FY23 White House budget, released in March 2022, requested a $773BN[2] DoD budget, although many expect the number will move higher as the House Armed Services Committee chairman has indicated closer to $800BN[3]
  • Increased budget certainty is likely to drive M&A interest in the sector for both strategic buyers and financial sponsors
  • The geopolitical situation in Ukraine is likely to alter both near-term and medium-term defense spending levels and priority areas. Russia’s domination of headlines and the rise of other potential state rivals may accelerate the DoD’s shift in focus from asymmetric to near-peer threats. We believe the conflict may also result in increased defense spending by NATO members, providing sector tailwinds for M&A valuations and volumes
  • We believe companies with differentiated technology and capabilities will continue to garner acquisition interest at premium valuations in Q2:
    • In government information technology spending, subsectors that are priorities right now are: digital transformation / modernization such as application development; cloud migration / operations and cybersecurity; low code / no code architectures; DevSecOps; and artificial intelligence / machine learning (AI / ML) analytics
    • In defense technology, we see priorities shifting towards electronic warfare, unmanned systems / autonomy, and hypersonics subsectors

Business & Tech-enabled Services

  • Similar to 2021, Q1 2022 saw a continued stream of digital transformation - particularly of legacy systems and processes, driving M&A across IT, voice and data management businesses. We believe these subsectors will garner interest from investors as these tailwinds persist
  • However, labor shortages and working from home have caused attrition across the sector, and we believe the uncertainty surrounding wage pressures on businesses has impacted profit margins and in turn valuations
  • The enhancement of managed service capabilities is expected to be a core area of focus for businesses in Q2 and beyond, who are seeking to bridge the gap between labor supply and deliverability. In turn, we anticipate an uptick in M&A activity and appetite for service providers across emerging technology ecosystems
  • Apprehension has arisen and is expected to continue for businesses with Eastern European delivery capabilities. As a result, we anticipate an increased level of acquisition activity closer to home as these businesses look to move to near-shore delivery

Consumer, Leisure & Retail

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

  • The current challenges faced by restaurant operators, including record food, energy and wage inflation, labor shortages, and supply chain constraints continue to cloud the outlook for the industry and overall M&A market
  • M&A activity in the sector slowed substantially in Q1, with deal volumes down versus levels experienced in both Q1 2021 and Q4 2021.[4] We believe the negative sales and labor impacts from the Omicron variant experienced at the beginning of the year, combined with near-term economic uncertainty resulting from historically high price inflation and low consumer sentiment, will continue to affect the supply of quality and actionable transaction opportunities in the market
  • Despite these challenges, the industry continues to experience positive sales growth, driven by record average check sizes.[5] In addition, response to heightened consumer demand for eating out, reduced capacity from restaurant closures during the pandemic, and strong balance sheets, many restaurant concepts are accelerating new unit growth and development which should lead to increased capital raising and M&A transactions throughout the year
  • We expect the supply of M&A opportunities to pick up over the next several months, as weak twelve-month performance was followed by a Covid-impacted Q1, and emerging operators seek new capital partners to support their next phases of growth
  • With continued commodity price pressures, labor challenges, and technological investment needs, we expect strategic consolidation activity across all segments to remain strong throughout the year. We also expect financial sponsors to focus their investment activity towards both franchisors with asset-light business models and franchisees in top-tier quick service restaurant systems, which have historically proven to be more recession resilient

Education & EdTech

  • We are seeing continued strong demand for EdTech opportunities, despite a return to in-person learning. This was witnessed in Q1 with some prominent transactions announced in the space in answer to heightened demand – highlighted below - and we expect this to continue in 2022:
    • Houghton Mifflin Harcourt to be acquired by Veritas Capital, [6] Discovery Education to be acquired by Clearlake Capital[7]
  • We are continuing to see a proliferation of digital solutions replacing / supplementing traditional in-person services, including pediatric behavioral healthcare (autism care, mental health). This shift has been partially driven by necessity (ie the setbacks of traditional models highlighted during the pandemic), but also through business appetite to scale and drive efficiencies by leveraging valuable resources
  • These digital solutions were a big area for investment in 2021 - Elemy raised a +$200M Series B led by Softbank in Q4 2021[8] - and the momentum continues into 2022 - Brightline raised a +$100M Series C in Q1 this year[9] led by KKR – which we believe will continue

Media & Telecommunications

  • As the media industry continues to evolve, it has become clear that the consumer facing media company of the future will need connectivity with the audience beyond content. These additional touch points are community, commerce, utilities & tools, and events & experiential.  We believe that at least three of those segments must be present for companies to succeed in the long-term


  • Starting in 2021, most of the transactions in the media segment have been driven by this mandate. Highlighted below are two sub-sectors that are receiving premium valuations as demonstrated by transactions from January 2022 and throughout 2021
  • Subscription driven businesses – example: The New York Times’ $500 million acquisition of The Athletic [10]

The 1+ million paying subscribers of The Athletic - a publication covering sports, which is a segment historically underserved by The New York Times - enabled the Times to reach its goal of 10 million paying subscribers[11]

The valuation was 8.5x revenue on a business known to lose tens of millions each year, indicating the sub-sector shows promise to The New York Times in the longer term as it moves to increase subscribers to the platform.[12] In addition, the acquisition brings opportunities related to Sports and local coverage penetration

Other transactions that demonstrate this valuation premium are Politico, bought by Axel Springer at 5x revenue[13] and The Hill, bought by Nexstar at 6.5x revenue[14]. We believe this  trend will continue throughout 2022

  • IP/Library/Video businesses – example: Nexon’s $400 million minority investment into AGBO[15]

AGBO is an entertainment company known for their filmmaking and ability to leverage its franchises to reach the audience across platforms, most notably with the Avengers series. This approach is directly aligned with Nexon’s focus on online games and Virtual Worlds. Post money valuation of AGBO is >$1 billion,[16] which we believe shows that top performing assets will be in demand as investors look to transact in the sub-sector  

Other transactions that demonstrate this valuation premium are MGM, bought by Amazon at 5.9X revenue,[17] Crunchyroll bought by Sony for 9.6x revenue,[18] and Hello Sunshine[19] & Moonbug[20] bought by Candle for 13.9 & 27.5x respectively – all indicating the IP / library / video business space will be active over the coming year, with market consolidation a strong possibility

Supply Chain, Transportation & Logistics Tech

  • The Covid-19 pandemic, along with global shutdowns, labour disruptions, and components shortages, have exposed vulnerabilities in the production and delivery of goods globally. This has driven unprecedented shifts in the global supply chain space – with M&A and investment activity front and centre to fund innovation as new solutions are needed to address the challenges
  • At the forefront is digital transformation and connectivity, which has proven essential to business operations – providing greater visibility, improving operational efficiency, and reducing costs. Over the last two years, we have seen the adoption of technology in the transportation, logistics and supply chain sector continue to accelerate and continue to drive deal activity in the space
  • Despite strategic investment interest increasing, private equity continues to comprise the majority of M&A activity,[21] as they utilise the much-discussed dry powder[22] available
  • With the high levels of liquidity and interest from investors and corporates, there has been a notable uptick in deal volumes and valuation multiples across the sector in the past two years[23]
  • For the coming year, as new disruptions arise and supply shocks continue, we believe interest from investors and strategic buyers will continue, increasing the opportunity for M&A in the space

Technology & Software

This edition, we focus on cybersecurity within the Technology & Software space:

  • In 2021, a staggering 82% of companies increased their cybersecurity budget, now constituting ~15% of total IT budgetary spend, up three-fold from 5% in 2020[24]
  • Cyber M&A remains strong with 100 deals closed at an aggregate disclosed transaction value of $14.5B in Q1 2022, up 45% from Q1 2021 and 12% from Q4 2021 in terms of deal volume.[25] Sponsor-backed transactions continue to drive M&A activity accounting for 52% and 60% of cyber M&A volume in 2021 and Q1 2022, respectively.[26] Both traditional and non-traditional cyber buyers remain aggressive in using M&A to supplement organic growth. On average, cyber revenue multiples, inclusive of both software and services transactions, have increased from 7.6x in 2020 to 9.2x in 2021 with a continued upward trend in Q1 2022 to 10.1x[27]
  • We believe private capital markets also remain highly active – with a healthy amount of competition between new investors looking to make their first bet in the category and well-versed cyber investors. Overall, the private capital market for cybersecurity saw 132 deals closed and $5.7B in disclosed transaction values for investments of $5M or greater[28] in Q1 2022 alone
  • We have seen the recent pullback in publicly traded technology company valuations largely not impact the private market M&A and investment valuations for cybersecurity companies with highly differentiated offerings and rapid growth. Publicly traded cybersecurity companies have performed better than the NASDAQ as a whole since the beginning of 2022, with the NASDAQ down 8.8% YTD and cybersecurity stocks generally up 0.6% YTD[29], given continued market growth and average financial profile that is at or close to profitability
  • Major cyber-attacks including ransomware, such as Colonial Pipeline and JBS, and supply-chain hacks, namely SolarWinds, Kaseya, Log4j, Okta/Microsoft, continue to be a driving force behind increased cyber spend, generating mainstream awareness and elevating cybersecurity to the top of C-suite and board priorities.[30] We believe this awareness will be a driving force for M&A deals in the subsector in both the short and longer term
  • The growing profile of large-scale cyber-attacks, and the significant financial risk associated with a single breach, has accelerated the adoption of cyber insurance, as well as new technologies looking to address and provide real-time monitoring of the risk posture of an enterprise eg security ratings, posture management, security/vulnerability assessments. Increasing demand for these capabilities from large strategics and sponsors will continue to drive M&A and investment volume, with deals getting done at premium valuations.
  • Geopolitical tensions in Eastern Europe have highlighted both near-term and long-term risks of cyberwarfare, with the Biden Administration reiterating on March 21 that Russia could target US government agencies, critical infrastructure and / or businesses with cyber-attacks in response to sanctions and aid to Ukraine.[31] Following Biden’s executive order on cybersecurity in January, the US government has allocated over $9.8BN to strengthening national cybersecurity efforts in 2022,[32] which we believe will draw huge investor interest into the space, and greatly bolster M&A activity
  • In answer to this threat, the accelerating complexity of enterprise IT environments – including hybrid / multi-cloud, external-facing applications, interdependence of development and IT operations, and the proliferation of mobile and IoT endpoints – has resulted in accelerating demand for next-generation solutions in areas such as cloud security, DevSecOps, endpoint security, attack surface management, IoT / ICS / OT security and security automation. We foresee these subsectors attracting huge investor interest as financial sponsors look to capitalize on this demand
  • In parallel, the evolving threat environment has resulted in increased demand for multi-vector threat intelligence capabilities to enable security teams to be more proactive in their defense – likely drawing similar investor interest into the space
  • Managed cybersecurity services have enabled companies to supplement internal security operations with outsourced talent and expertise. This has been especially important given overwhelming alert volumes as well as the difficulty for some companies to attract, train and retain in-demand cyber talent. Managed security service providers (MSSPs) and managed detection and response (MDRs) in particular have seen both investment and acquisition interest at premium valuations given revenue growth profiles,[33] and we have observed in the case of select scaled-up MDRs, their ability to drive SaaS-like gross margins and retention rate has driven this interest too – examples include Critical Start’s growth investment from Vista Equity Partners