M&A deep dive: surprising Q1 takeaways for PE firms.

You’ve probably seen the headlines:

• “Global M&A Hits the Skids as Ukraine War Saps Confidence”
• “Global Dealmaking Falls to Lowest Level Since Start of Pandemic”
• “​​2022 M&A ACTIVITY OFF TO SLOW START”

Quite a contrast with the record-setting M&A volume of 2021, when PE and VC firms backed $400 billion in tech deals alone, no? It’s all the more startling because the widely held consensus coming into 2022 was that we were in for yet another supercharged year.

With so much changing in the month since then, it’s worth asking: How exactly did we get here? To what extent has PE been impacted? And what’s coming next?

Let’s go on a deep dive to answer all three questions.

Rewind to the start of the year: The prevailing mood around M&A activity generally, and PE’s role in it specifically, was downright bearish. Compared to CEOs from all other sectors, for example, PE CEOs were the most confident that revenue growth would continue for the next 12 months, according to PwC’s Annual Global CEO Survey.

Fast on the heels of such blustery forecasts, to what extent have things changed?

On the one hand, a lot.

Most notably, of course, the macro-level fallout from Russia’s invasion of Ukraine is almost impossible to overstate. Disruption to the overall M&A outlook was visible almost overnight (although jittery markets, regulation and ongoing supply chain disruptions have also been cited as factors). Whatever the underlying cause, in any case, the value of M&A activity in the first quarter of 2022 dipped 29 percent compared to the first quarter of 2021.

But on the other hand, things aren’t as different as the headlines might lead you to believe.

Sure, total transacted revenue in the first quarter of 2022 fell significantly below the $8.8 billion total from the first quarter of 2021 — but then again, that was the second-highest first-quarter figure ever on record.

Yet the much more intriguing thing, at least from PE firms’ perspective, is that the official storyline doesn’t really seem to apply to them. That is, even in the face of macro-level economic disruption and geopolitical volatility, these firms have been carrying on business as usual.

Just look at the following two noteworthy findings, for example:

• PE-backed buyouts represented a larger share of overall M&A activity in the first quarter of 2022 than they did in the first quarter of 2021: 29 percent versus 19 percent, respectively. 
• Not surprisingly, given that increased share of the pie, PE-backed buyouts on the whole were also up year over year, climbing to $288.2 billion during the first quarter.

So even if the “megadeals,” or transactions in which the seller or smaller party has revenues in excess of $1 billion, which characterized much of pandemic-era M&A activity haven’t been on the table so far this year, the landscape isn’t radically altered for PE firms. They’re still sitting on a record $1.3 trillion of dry powder, for starters — and that fact alone should incline many to seek out initial investments, add-on acquisitions and other opportunities throughout the remainder of 2022.

But there’s one caveat for those firms that do: New leadership challenges await you.

Are PE’s first-quarter numbers an indicator of what’s to come through year-end? If so, it would certainly seem like strong evidence that PE firms haven’t become gun shy all of a sudden. On the contrary, they look eager to deploy their substantial cash piles into new purchases.

Either way, now is probably the time for PE firms to start thinking proactively about the new leadership needs that those investments, acquisitions and other activities could generate. Why? Because two interconnected risks are already visible on the horizon: runaway inflation and interest rate hikes.

As for the former, the Consumer Price Index jumped a dramatic 7.9 percent in a single month earlier this year, dovetailing with the fastest pace of annual inflation in 40 years.

As for the latter, interest rate hikes are simply how the Fed combats inflation — and given how inflation is trending right now, further interest rate hikes are almost certainly coming. In all likelihood, the Fed will probably increase interest rates three or four times in 2022, for a total increase of 75 to 100 basis points in the Federal Funds Rate, according to forecasts. And if and when that comes to pass, it will have serious implications for M&A activity, potentially decrease acquisition values and further compress margins.

For PE firms operating in this straitened environment, sourcing and placing great leaders at newly acquired portfolio companies is going to be an essential component of unlocking value and driving multiple expansion. To successfully navigate uncertainty and arrive at the right strategic decisions, they’ll need to have the right people in place.

To a certain extent, that’s the only thing you truly do control, and getting it right makes a world of difference. Of course, given the roughly 95 percent increase in the number of new CFO appointments at tech companies last year, picking up seasoned executive talent may not be easy.

But that’s where the team from Tatum can step in to deliver value. Get in touch with us today if you want to see our wheelhouse in action. We’ll connect you with the experienced C-suite leaders your PE firm needs for tomorrow.