2021 was a record-breaking period for mergers and acquisitions, with deal activity incredibly high due to a combination of factors.
Not only did fears about tax hikes stimulate a flurry of deals prior to 3 March 2021 but we also experienced a post lockdown “bounce” as deals previously placed on hold reactivated and multiple ownership and management teams emerged from their home offices with a desire to de-risk and ultimately move their assets onward.
Private Equity has also been a driving force behind deal flow, with a period of hiatus during spring 2020 leading to a back log of deals and ultimately in undeployed capital which needed to find a home – and this buyer population has therefore hit the pavement hard, with buy and build strategies becoming ever frequent and new investments now finding their way into sectors and teams which were perhaps ignored in years gone by.
Momentum therefore exists and the start of 2022 appears no different, with some experts predicting comparable deal flow for 12-18 months.
The landscape, however, remains fraught with risk and some of that risk is now beginning to crystallise. Government support schemes are now scaling back, with existing initiatives operating in their final months and offering much reduced cover for those lucky enough to qualify.
Further schemes will no doubt follow but these cannot be expected to match those initially introduced and hence we find ourselves in an era where risk lurks across supply chains and customer bases – and insolvency activity is now indicating the end has been reached for some. The movement in insolvency action is no surprise, indebtedness in some quarters has ramped beyond a sustainable or viable level and the softening of rules and regulations permitting creditor action have now tightened back up. Compounded by the crown preference, which has received very little coverage, funders are now appraising their books with a higher degree of scrutiny and those seeking top up facilities or even looking to renew may start to face issues. For these reasons we are now seeing more accelerated transactions – the kind where trade and assets are brokered rather than share capital.
Labour supply is a critical risk
Looking closer at supply we must also recognise that labour supply is perhaps a critical risk for most – with working patterns now completely different and some sectors in desperation as they look to compliment and replace their existing and lost team members. BREXIT is one issue behind this, but the consequences could be longer term in duration particularly when inflation is considered.
2022 will therefore likely be a period where movement in businesses remains prevalent- whether that be due to changes in ownership or for other reasons. We may well start to hear about a growing population of “losers” ‘as well as “winners” – with risk reviews, due diligence, careful planning and more planning on top of that likely to be essential. Risk can feel like an intangible factor to assess, but the monetary impact is starting to be felt and the use of matrices and reliance on advisors could make a real difference in the coming months. Private equity thirst will show no derailment and is going to be a key source of capital for M&A, with some investments also likely to be moved onward again – with the passage of investments throughout the PE ecosystem amongst operators in the UK and beyond.
Trade buyers with capital will remain active, and the endless number of cold approaches faced by some businesses will likely continue, with a worrying proportion of these buyers likely to include those without their own capital or a track record in executing such purchases. This may not be a bad thing and a volume of leveraged buy outs will commence but selling teams will need to be wise and conscious as to the capabilities and backing of the approaching parties, not to mention the deliverability of their purported plans.
My advice is therefore simple – good luck for the year ahead and make the most of the growth opportunities which may present themselves, but do not lose sight of what your suppliers, customers and competitors are doing and keep your funder(s) onside. Approaches to acquire/transact with you should be assessed with caution and be sure that you understand and agree with all terms and conditions which may apply.