Smaller targets keep M&A activity strong

Cris Collingwood//March 27, 2023

Smaller targets keep M&A activity strong

Cris Collingwood//March 27, 2023

Ryan Hurst, consulting partner and leader of RKL’s Transaction Advisory Services Practice, said 2022 activity was down from the robust activity of 2021, but the market was still good, and he sees that continuing through this year.  

That is, in part, due to private equity firms having money to invest and their willingness to look at smaller targets to diversify, Hurst said. 

Ryan Hurst

RKL’s 2022 Regional Transaction Report showed regional and national mergers and acquisitions (M&A) receded in 2022 following a post-pandemic-driven surge in 2021. The number of transactions in the region decreased 14% versus 2021, although they were still up seven percent compared to 2019’s pre-pandemic level. 

“I’m not surprised. 2021 was so strong and 2022 was trailing from the peak,” Hurst said. 

“The first quarter of 2022 had the most activity. This resulted from a carryover of the late 2021 surge, which was driven by substantial availability of inexpensive credit, private equity dry powder, the amount of committed capital private equity firms have available to make acquisitions, and companies flush with cash, as well as rebounds in financial performance for many businesses, the threat of tax reform and pandemic-fueled burnout among some business owners,” he said. 

Inflation, rising interest rates and general economic uncertainty served as headwinds for much of 2022, according to the report. 

“It’s still a good market,” Hurst said. “There is a lot of resilience despite the headwinds that included labor supply issues, inflation and interest rates.” 

Private equity firms have been a key driver of the activity. Hurst said they controlled 30% to 35% of the activity a few years ago but they accounted for more than 50% in 2022.

According to the report, during 2022, 242 buyers were either private equity investors or sponsor-backed companies (down slightly from 244 in 2021, but up from 158 in 2020 and 171 in 2019).  

There were 60 private equity deals in the Berks, Capital Region, Greater York, Lancaster or Lehigh Valley, which was down from 2021, but still well above 2019. 

Sales of private equity sponsor-backed companies have been prevalent for several years, with the Berks, Capital Region, Greater York, Lancaster and Lehigh Valley seeing the 2022 total returning to pre-pandemic levels, according to the report. 

Private equity firms have money to put to work, Hurst said. They continue to raise funds and as they deploy them, they raise more. They are looking for alternative investments outside bonds and the stock market, he said. 

“They can chase better returns without going into the volatile markets, so they are going into the private equity sector,” Hurst said. 

Transactions in the health care, manufacturing and distribution (M&D), and services industries were most prominent in 2022, representing 61% of all regional transactions.  

Other hot industry sub-sectors included consulting services, insurance brokers, application software, and construction and engineering, Hurst said.  

 Capital Region M&A activity ebbed in 2022 to below pre-pandemic levels, according to the report. The number of Capital Region buyers was the main driver. Targets decreased from 2021, though they remained above pre-pandemic levels. Health care was the strongest industry, with no dominant buyer. 

 Keystone Agency Partners continued to be an active investor with five acquisitions. The Capital Region remained attractive to private equity firms or sponsor-backed companies, with 11 targets in the market acquired by these firms. 

Activity in the Lancaster market remained in-line with pre-pandemic levels, according to the RKL report. In 2022, transaction volume decreased from 2021, but remained near the 2019 level.  

M&D was the leading industry group, which was consistent with prior years. Private equity firms and sponsor-backed companies continued to have significant interest in the Lancaster market in 2022, with nine targets in the market acquired by these buyers. There was no dominant buyer in the market, the report showed. 

Berks activity decreased to pre-pandemic levels. Buyer activity was the primary driver while targets in the market increased from 2021. With seven acquisitions in 2021, Rentokil North America had been a major contributor to Berks M&A activity in 2021, but did not complete any acquisitions in 2022, the report said. 

 Interest in the Berks market by private equity firms and sponsor-backed companies picked up in 2022, with six companies in the market acquired. 

Lehigh Valley was the only market in the region which experienced a decline in transaction activity from 2020 to 2021, with another decline in 2022.  

The report showed buyer activity further decreased while target activity was close to 2021. M&D, health care, services, and consumer and retail were the top four industries in 2022.  

Private equity firms and sponsor-backed companies had significant interest in the Lehigh Valley in 2021, with 11 targets in the market acquired. 

Private equity firms, which for the purpose of the report primarily include funds, private investors and family offices targeting control buyouts of companies, continue to have a strong presence within the region.  

In 2022, more than half of transactions in RKL’s dataset involving a target in the region included a private equity buyer, compared to 38% to 49% in 2018 to 2021.   

Forty percent of 2022 transactions with regional targets included a sponsored buyer, compared to about 25% in each of 2018 and 2019 and around 32% in each of 2020 and 2021.  

RKL said this trend is driven by private equity’s ongoing desire to put capital to work. U.S. buyout dry powder exceeds $700 billion. And, despite higher interest rates, debt remains readily available to quality borrowers, raising total available capital to make acquisitions to well over $1 trillion. 

The report showed private equity firms, for the past several years, have felt that there is too much capital chasing too few (good) deals. That sentiment is more prevalent than ever, according to the report, with many companies suffering the effects of rapid price inflation, supply chain disruptions, shifts in buyer preferences and mentality, and sellers that have rushed to market without adequate preparation.  

In order to increase deal supply, they have reduced their minimum target criteria from once lofty levels for this region, RKL said. 

 Additionally, new firms have emerged, focusing on targets that were once below the radar. 

“Some private equity firms in our network will evaluate companies with $500,000 of EBITDA for the right platform opportunity. All of this presents terrific opportunities for well-equipped sellers in the region,” Hurst said. 

 Nevertheless, scrutiny remains high, as private equity firms seek growing, low-risk businesses in highly defensible, recession resistant industries to combat economic uncertainty. And their due diligence processes remain as robust as ever, forcing sellers to either be well-prepared or face a lengthy and tense due diligence period.