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M&A Report for Mid-Year 2022 Lower Middle Market Perspective

While 2021 was a record year for global M&A with a 64% increase in deal volume, 2022 is pointing to a pullback. The M&A market is facing a number of challenges including a turbulent global macroeconomic climate affected by the highest inflation rate in 40 years, interest rates almost doubling, broken supply chains, and Russia's invasion of Ukraine. Consequential to the bear stock market, US Investor Sentiment is down to 18.2% from a peak of 56.9% in April 2021. The silver lining is that there is still a ton of dry powder sitting on the sidelines. What does this all mean for M&A deals?

1. Tangible Incremental Value. In times of uncertainty, Buyers look for (i) strong existing management, (ii) a defendable position in fragmented markets, and (iii) predictable cash flow with strong EBITDA margins (depending on industries, but generally above 15%).

2. Lower Valuations. Higher cost of debt translates to an increased discount rate, a greater equity requirement, and thus lower valuations. So far, we have seen only a marginal pullback on valuations. But time will likely change that.

3. Cash Is King. The higher cost of debt is putting leverage buy-out strategies (LBOs) and Independent Sponsors at a disadvantage over pre-committed Private Equity and Family-Office investors. This means Sellers need to be more diligent in selecting well-funded Buyers with a substantive track record.

4. Reshoring. The supply chain disruptions experienced during Covid caused many businesses to look at “re-shoring” and “near-shoring” production and operations. This is creating unique opportunities for US- and Mexico- based contract manufacturers, as well as suppliers of critical goods, materials and commodities.

We are excited to announce that Pacifica Advisors has again been recognized in the Top 25 Investment Bank according to the Axial’s Lower Middle Market Investment Banking League Tables (out of 930 advisory firms). We are launching many new deals for the last 2 quarters of 2022, and so we expect to climb back to the Top 10 rankings. 

Did you know that 48% of business buyers are US-based private investors and private equity firms?

Did you know that most M&A transactions (53%) fall as lower middle market (under $100 million in value)?

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Nicolas Biancamano

Managing Partner

(858) 779-9095

David Behar

Senior Associate

(858) 414-5384

Fred Poirier

Business Development

(858) 356-7181

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