Is 2022 The Beginning of the End? Or the End of the Beginning?

The year 2021 finished with historically high levels of deal volume and valuations. Fueled by pent up demand following the slow down caused by COVID pandemic in 2020, combined with amazing bounce backs in financial performance of Small and Mid-sized Business. The Merger and Acquisitions market is downright frothy. The aforementioned statement is not being debated. What is up for debate is when will this end? Or has it already started to end?

Consider that Private Equity has over $1 trillion in committed capital that needs to be invested, many of these firms are still behind their deployment schedules putting more pressure on them to find and execute deals. Strategic buyers have robust balance sheets and eager partners in traditional banks as well as privately backed lending sources to fund acquisitions.

U.S. Manufacturers have increasingly moved their production back to the U.S. from China or other countries, this is often referred to as “Onshoring.” With the supply chain issues still

unresolved, this Onshoring trend should continue for the rest of 2022 at least. Another trend that could make Onshoring a permanent movement is the investment in automation by U.S. Manufacturing companies. This is partly due to the increasing labor costs in the U.S. and most recently the shortage of available workers to fill open positions. With the implementation of automation, such as robots and self-running machines, labor rates become less of a factor in total manufacturing costs which substantially diminishes the attractiveness of moving

production back offshore.

The Federal Reserve has committed to combating inflation and is slowly increasing interest rates, this typically signals the beginning of the end of a growth cycle. In this case however, interest rates that produce a modest yield could help fuel M&A as it opens the bond market to business owners looking for a safe place to keep their proceeds from the sale of their business. Slightly higher interest rates do not drastically impact M&A activity until the buyer’s cost of capital, which is largely forward-looking, increases and begins to reduce the premium they can pay for overperforming businesses. This is especially true with proven, tangible asset-heavy businesses.

We see 2022 as the end of the beginning for the Industrial sector as many of the current positive trends should continue beyond 2022. However, we expect this level of activity and valuation to remain constant and don’t see a lot of room for buyers to continue to increase valuations of privately held businesses from their current lofty levels. This means business owners thinking of an exit today have no incentive

to wait another year or two as the market could still change for the negative. Threats that we continue to monitor include, Federal interest rate hikes; Geo- Political factors, such as Russia invading Ukraine, the impact of the Infrastructure Bill, SEC actions to make Private Equity more transparent, and mid-term elections. All these potential threats could reverse our views of the M&A market opportunity for SMB owners of Industrial businesses.

Eric E. Dunn Managing Partner, Invision Capital Advisors

Eric Dunn is Managing Partner at Invision Capital Advisors, he oversees all aspects of the firm’s M&A Advisory Practice.

Invision Capital Advisors is a specialized Investment Bank and Merger & Acquisitions Advisory firm; the firm provides Sell-Side and Buy-Side Advisory Services to lower middle-market businesses in the Manufacturing, Distribution, and Business Services Industries.