US economic snapshot

  • New set of risks: war, not Covid - Geopolitical tensions in eastern Europe bring a new source of market disruption, as Covid begins to take a back seat from headlines[1]
  • Federal Open Market Committee focusing on inflation - FOMC racing to catch up as the US is behind the inflation curve[2]
  • Consumer spending - consumers remain active despite the constraining influence of high food and energy prices[3]
  • Forecast update: avoiding recession – challenges are notable, but the current economy is strong and can absorb some shocks, with rising energy prices being the most immediate constraint on growth. We believe the US will likely weather the storm[4]

Q1 2022 M&A highlights

  • M&A in the US mid-market recorded its busiest year ever in 2021,[5] and we are seeing indications that 2022 will be another busy year - although we believe it is unlikely to reach 2021’s record levels
  • Though the year started slow, with January deal activity levels low, February picked up significantly and March came in with rates similar to those seen in mid-2021,[6] indicating potentially larger deal volumes through Q2 as investor confidence strengthens

(Source: ‘US PE Breakdown’, Pitchbook, April 11, 2022)

  • Ample dry powder and high levels of liquid debt in the market, albeit at higher rates, shaped the dealmaking environment in the first quarter. However, the future remains uncertain amid current challenges:
    • Inflation is top of mind for middle-market firms as consumer price index gains have surpassed 7% in 2022[7] and financial fallout continues from the geopolitical situation in Ukraine, increasing investor hesitation
    • Supply chain issues and labor shortages continue to impact cash flow projections for 2022, which may impact eagerness to transact in the short-term
    • Middle-market fundraising has slowed, resulting in less dry powder competing for available middle market transactions
    • Exit counts have also slowed, with a split between robust marketplaces for a diminishing number of exceptional assets and a widening bid / asked spread for lower quality offerings – both of which could potentially stall deal volumes
  • Though the above trends are causing exits to slow market hesitancy increases, as illustrated below, exits are still dominated by sponsor-to-sponsor activity – resulting in less recycled capital available to LPs,[8] which we believe could hinder dealmaking towards the end of the year

(Source: ‘US PE Breakdown’, Pitchbook, April 11, 2022)

  • As illustrated below, first time funds and small-to-mid-market successor funds have been impacted most in this fundraising marketplace,[9] with many delaying final closings and relying more on co-investment

(Source: ‘US PE Breakdown’, Pitchbook, April 11, 2022)

  • In January, it initially appeared that the 2021 constraints on the availability of transaction resources at every stage of the M&A process had eased.[10] As March came to a close, this trend had reversed, albeit not to the scarcity levels experiences in the 3Q and 4Q of 2021[11]. Transaction resource scarcity is an early indicator of a pickup in activity in the pipeline of M&A activity over the coming months
  • As we begin Q2, the fierce competition among US PE funds will likely continue in the mid-market, especially for exceptional assets. Equally, the marketplace for other assets will continue to be active, with variability in bid / asked multiples, driven primarily by the impact from the 2022 macro backdrop as it continues to take shape

Private Capital

  • Overall, Q1 capital raises have continued from 2021 levels,[12] driven by long transaction lead times with transaction volumes continuing to be supported by interest in mega rounds (fundraising rounds of $100 million or more)
  • These mega rounds, driven by the abundance of capital raised for mega-funds, have generally escaped the overhang of a variety of macro factors and higher interest rates which have mainly impacted smaller deals[13]
  • Enthusiasm for larger private capital raises remains high however, despite the macro impacts, as the availability of the alternative public market liquidity, SPACs and IPOs have significantly decreased[14] while the availability of capital to mega-funds is the highest on record[15]
  • As we begin Q2, we believe investor interest and momentum will continue to drive a robust private capital marketplace for high quality issuers. The wide pool of capital resources available for transactions of this caliber, driven by continued fundraising momentum, well positioning the funding to scale for the next generation of growth companies

Asia Access

Q1 insights

  • We continue to see a strong appetite from Japanese strategics for cross-border acquisitions, especially now that most of the relevant travel restrictions have been terminated
  • Transactions from Japanese corporates acquiring US targets during Q1 2022 increased by 67% in deal volume and 28% by value[16] compared to Q4 2021, as the Technology & Software sector continues high levels of activity and traditional sectors – such as Industrials and Consumer, Leisure & Retail - see an uptick as life returns to pre-pandemic norms
  • We also observed that cross-border transactions have broadened to various sectors, including Industrials and Infrastructure. We see this as a clear shift from previous quarters, where the majority of the deals were led by the Technology and Software sector, likely due to its resilience to market instability
  • Notable transactions in this quarter includes Murata Manufacturing’s acquisition of Resonant for USD 295.7m,[17] Taiheiyo Cement’s acquisition of Martin Marietta Materials for USD 250m[18], and Sekisui House’s acquisition of US homebuilder, The Holt Group, for an undisclosed amount[19] - all of which show a post-pandemic re-emergence of non-tech deals, which we envision will continue throughout the year

Outlook for Q2 & beyond

  • We believe M&A activities by Japanese corporates will accelerate further across a wide range of sectors in the second quarter, as travel restrictions become less stringent globally
  • We have seen a notable increase in interest from Asian private equity firms and shareholders to begin processes with the view of completing transactions this year, likely resulting in an increase in cross-border activity towards the end of the year
  • Though there are geopolicital risks and economic uncertainty, we believe there is still an appetite for Japanese corporates to conduct US acquisitions – and given their high levels of dry powder and low interest rates, we expect them to play more significant role as buyers, despite some headwinds due to rapid depreciation for the Japanese Yen[20]
  • Finally, ESG continues to be critical for M&A in Japan, as the Japanese government sets its sights on being the leader for carbon neutrality in Asia,[21] coupled with increasing awareness of environmental concerns across the region. We are already seeing strong needs for ESG metrics when searching for acquisition opportunities. These criteria include, but are not limited to, metrics such as renewable energy, cleantech, circular economy, and carbon neutrality – areas of the US market which are attracting increasing interest from Japanese buyers

Sector commentary