While 2021 was a record year for deal activity, it is becoming tougher to make things happen in 2022. Last year there was a ton of money on the sidelines and deals were done at a record pace. Dealmakers have benefited from two decades of low interest rates which assisted in making the deal process easier.
Most of today’s investors were either too young or don’t remember what it was like to try and get a deal done during an inflationary period.
Now in 2022, times have changed, and some dealmakers are dealing with issues they have never faced before:
- Inflation is currently at its highest rate in forty years and interest rates continue to rise. Even after the most recent interest rate increase, there are signals that more increases are anticipated for this year.
- The Covid-19 pandemic has caused supply chain issues and contributed to the labor shortage as workers have jumped out of the job market.
- The war in Ukraine is also contributed to inflation.
So, what does this all mean to dealmakers? Dealmakers are concerned that company values will decline. Valuations may not support what sellers are asking for their company. The rising costs of everything are impacting the bottom line and reducing multiples. Even if the multiples are being averaged over a number of periods, the current decline will impact the value.
Based on these concerns, private equity groups may hold onto portfolio companies longer, hoping there is a rebound and the potential recession is mild. The hold time of portfolio companies has decreased the last few years, but that trend may reverse in 2022.
It will be interesting to see what happens with deals and how much activity there will be in the second half of 2022.
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