What can we expect from 2022?
2021 was a successful year for the mid-market and looking ahead deal flow is in rude health (deal volumes are +60% YoY by some measures) and these conditions show no sign of abating in the short-term. However, Omicron and the latest restrictions will inevitably impact on sectors such as travel, hospitality and events.
What can we learn from 2021?
- Deal volumes and valuations have strengthened throughout the year, driven by continued capital flow and companies seeking investment (often prompted by a post-Covid realisation that ‘phew, that was close’). As Mike Callow (Head of Technology) and Simon Hemsley (Head of Business & Financial Services) discussed with Real Deals in their article, ‘Increase your exit multiple by getting the expansion strategy right’, these conditions could be with us for some time…
- Coming second is easy. Early triage by investors is essential to avoid wasting time by coming second in hard-fought auction processes.
- Buy & build is a pragmatic, low-risk way of deploying capital in this market, which Simon Hemsley discussed with Real Deals during the summer.
- A broad range of sectors are in full ‘revenue growth’ mode. Industries that support top line growth are benefitting, e.g. recruitment, training, digital transformation. A more detailed discussion of this can be found in our article, ‘Recruitment – Heating up again for Private Equity’.
- Consumers are striving for a return to normal, switching spend to social experiences, and some lockdown boomers are busting (want an almost-new Peloton bike anyone?). But as the year came to a close, the optimism and relative normality of the last few months was starting to wane.
- The Great Resignation – while an overused catchphrase – is benefitting small, nimble, values-driven business at the expenses of larger corporates. This is a competitive advantage that has not been afforded SMEs for several years.
- Wage inflation and The Great Resignation is resulting in knowledge work automation, a new growth driver for digital transformation. Mike Callow discussed the consolidation of MSPs in, ‘It’s MSP season again in the private equity mid-market. What’s behind the wave of deals?’.
- A value generation plan is required pre-deal. High valuations require a value generation strategy, a detailed action plan, and advisers to be identified at completion, ready to deploy in the first month of ownership. This was a central theme at the Real Deals Diligence Roundtable discussion in the summer.
- Pricing – historically a surprisingly underused lever – is becoming increasingly important to help businesses adapt to inflation, rising input costs and some of the disruptions of the last two years.
- Diligence continues to evolve; digital and IT are now well-established, and ESG is gaining prominence. Peter Cookson, Managing Director, discussed this in his discussion of consumer supply chain trends, ‘Retail – taking stock of the supply chain’.
So, what can we expect from 2022?
- Across Europe, Covid restrictions have returned, which will dampen domestic demand and inbound tourism.
- In professional services, the shift to hybrid working is here to stay. The challenge is to balance higher efficiency with lower effectiveness, while avoiding staff burnout and churn. Onboarding and innovation also need care and thought to redesign for a home/office location mix. Providers of associated support services and systems will benefit – providers of services as diverse as digital transformation and people development will be in demand in 2022.
- The digital transformation of wealth management will continue apace. IFAs and wealth managers will further automate manual processes, reduce cost-/time-to serve, and focus staff on providing high-touch client services. Again, providers of these supporting services and systems will benefit.
- Technology MSP dealflow has legs. MSP service offerings are evolving at a pace, is your MSP’s service offering right for its target market (not least in the security segment, in full land grab mode)? What should its roadmap look like and can you accelerate it with M&A? How can it take advantage of the convergence of MSP domains like IT, comms, connectivity, networking and security? How far up the value chain into strategy, transformation and applications could (or indeed should) it go?
- Low code is causing ripples. Low code is everywhere and indeed, some MSPs are leading the charge. The bar to using custom applications and integrations is falling quickly, and management teams across PE portfolios need to take advantage. See Mike’s article, ‘Low code; a hyped technology which is already delivering for the mid-market’.
- Time for private cloud to have a moment in the sun? The cost of public cloud workloads can be unpredictable, and occasionally eyewatering. Modern private clouds (not hosting!) can offer the right balance of cost and performance for enterprises and SMEs. MSPs with offerings that balance cost/benefit for SMEs should thrive.
- Microsoft is everywhere, other ecosystems are available, and some are rather attractive. The Microsoft channel continues to be a great hunting ground, but good quality deals can be hyper-competitive. The lower mid-market has a golden opportunity to bring through smaller, innovative, specialist partners to keep the ecosystem healthy. Investors need to ensure that the vendor is the right horse to back.
- Overseas travel will continue to struggle given Omicron-related restrictions. However domestic tourism will rebound strongly as people take fewer, longer, higher-priced UK holidays. Secluded, super-premium resorts and small-group escorted tours will benefit.
- Trade events will roar back to life – it is a matter of when not if. The tradex/confex model will remain at the sector’s heart, buttressed by complementary profit centres such as training, software, consultancy and direct buyer/seller introductions. A portfolio with multiple products and channels is now essential to achieving the highest valuations.
- The property market, already hit by labour shortages and input price inflation, will experience the first interest rate increases for 14 years. Operators in the built environment need to adjust to ensure operating margins are protected. Use of improved digital systems and building techniques such as modular construction will increase.
- In the industrials sector, operating conditions will become a little easier, but only in places. Wage inflation will be sustained, and energy and materials input prices will fall slightly from Q4 2021 highs.
- Fattening of supply chains will remain a feature of goods importing throughout 2022, perhaps longer.
- Ongoing investor interest in TICC (testing, inspection, certification & compliance) and fire & security will spread to ESG services and renewable energy.
Please speak to myself or a member of the team if you would like to find out more.
Tom Raymond, Partner
+44 7762 386 216