• The high dealmaking volumes of 2021 have shown no signs of slowing in the first quarter of 2022, according to RSM experts
• However, the war in Ukraine could act as a drag on activity in the months ahead
• RSM announces it worked on 614 completed deals in Europe last year, an unprecedented level across the Network in Europe

Global mid-market M&A activity has continued robustly in the first quarter of 2022, says RSM, the world’s sixth largest audit, tax and consulting Network, as it announces it worked on 614 completed deals in Europe last year.

A new report published today by RSM brings together market insights from transaction advisers in countries across Europe, the US and Latin America, and finds that the dealmaking volumes of 2021 show no signs of slowing in the first quarter of 2022. With high levels of capital available and continued strong appetite for quality targets from both private equity investors and corporates, RSM predicts a busy 2022 for middle market M&A.

However, the war in Ukraine – which in addition to its dire humanitarian impact is causing inflation in the cost of raw materials and commodities – could impact deal activity and broader economic confidence in the months ahead.

RSM’s advisers supported unprecedented levels of global deal activity in 2021. Among the 614 transactions completed by RSM Firms in Europe last year, the technology, media, and telecom (TMT) sector was the driving force, with 152 deals, followed by 90 completed in the engineering and manufacturing sector.

The top three middle market trends to watch out for this year are:

1. Entrepreneurs and founders are taking advantage of a market high to exit

Middle market businesses are continuing to drive up the deal count as large numbers of entrepreneurs and family owners take advantage of sky-high valuations and the easing of COVID-19 restrictions to sell up, often coming to market earlier than previously intended after enduring two years of challenges related to the pandemic.

The last two years have been particularly trying for middle market businesses, many of which are family-run or owner-led. This has coincided with high levels of institutional money seeking high returns in higher risk alternative assets, such as private equity, which has opened up vast untapped reserves of capital to private equity firms and driven valuations higher for target companies. These factors have presented opportunities too good for target companies’ shareholders and boards to ignore.

2. The impact of the war in Ukraine could soon start to be felt on deal activity

The war in Ukraine looms large as a potential drag on deal activity. At present, positive demand drivers and the availability of capital are more than offsetting the uncertainty. But the risk to the wider economy from the war will be causing decision makers to pause before they sign investment agreements.

In addition to the tragic humanitarian cost, the impact of the war will be felt through increased commodity and energy prices, particularly where Russia is a key part of the supply chain, such as in commodities and raw materials. Manufacturers and consumers in particular will feel the pressure.

Additionally, pressure is being added to global supply chains that were already facing persistent challenges created by the pandemic and issues such as the chip shortage, threatening trading performance in many industries. The war in Ukraine will add to those challenges.

3. The TMT sector – particularly B2B software – will continue to see intense dealmaking

The increased digitisation of people’s lives and reliance on TMT products that was accelerated by the pandemic led to rising deal volumes in the sector in 2021. RSM has seen investors take particular interest in companies that produce enterprise software, SaaS and Cloud technologies that enable remote working. Many of these products have become embedded in customers’ core operational infrastructure, increasing the prospects of predictable recurring revenues for investors in the companies that make them.

Software companies are being snapped up by bigger businesses who need to rapidly add digital capabilities without the cost and timescale that organic growth would involve, driving up the number of deals and leading to exceptionally high valuations. This trend is set to continue in 2022 even in spite of economic headwinds. Companies providing B2B enterprise software are more likely than their consumer-facing TMT peers to remain resilient through the cycle.

Lee Castledine, a partner at RSM UK and a member of RSM's Global Due Diligence Leadership Team, said:

“Transitioning from 2021 into Q1 2022, we saw deal volumes continuing to remain buoyant with high levels of capital available. The appetite from both private equity investors and corporates also remains strong and currently the data shows no sign of this slowing down.

“At present this dynamic is more than offsetting geopolitical and economic factors that might serve to undermine confidence and dampen deal activity as we progress into 2022. The appalling humanitarian crisis in Ukraine continues to escalate, and while the full scale of its impact is unpredictable, it looms large as a potential drag on the broader economic outlook and on deal activity generally.

“Across Europe we witnessed an extraordinary volume of deal activity in 2021 with over 600 transactions completed by RSM Firms and a number of key trends emerging. In the middle market, business owners and entrepreneurs are opting for early retirement as the uncertainty and stress of COVID-19 come to bear. This has been compounded by record-high valuations becoming increasingly appealing, while others look for investment to scale up through the economic recovery.

“Whilst strong ESG credentials remain a lower immediate priority for investors today, many are starting to recognise their growing importance, specifically private equity firms.  Private equity firms are powerful agents of change, and the same expertise that traditionally helped middle market businesses to improve their financial performance, can be harnessed to add rigour to ESG reporting and governance. We expect this to develop over time and for us to witness these firms driving development of ESG frameworks with the goal of enhancing value and generating greater returns on their investments.”