While most enterprises in 2021 were finally beginning to adjust and regain their footing after enduring a tumultuous pandemic-year, the M&A, private equity, and venture capital industries found themselves hitting the ground running – delivering a record-breaking year during a period of mass economic uncertainty.

In 2021, startups raised an impressive $329.9 billion in venture investments, doubling 2020’s annual record, while private equity fundraising flourished and global M&A delivered its strongest year on record. But even though 2021 was an undeniably glowing year for investors, there is one outstanding question: Will 2022 follow suit?

To find out, Corporate Growth, Capital Style, caught up with Nathan Birhanu and Sonya Lu, Vice Presidents at the investment banking firm Clearsight Advisors.

Here is what they had to say:

Corporate Growth, Capital Style (CGCS): What were the top trends of 2021 in the business services and technology-enabled services landscape?

Sonya Lu: As we emerged from the height of the pandemic, the professional services M&A market reached record-breaking highs in 2021. An abundance of available assets in the market was matched by companies competing to acquire transformative capabilities. In combination with the low cost of capital and record levels of undeployed capital, valuations and deal activity soared.

In the private equity arena, strategic buyers saw an increasingly diverse M&A landscape in 2021 as financial investors became a major force. Record levels of undeployed capital, cheap debt and high returns drove significant participation from private equity, venture capitalists and other investors. Across the board, M&A has become an institutionalized strategy among large and mid-cap players.

From a convergence perspective, digital transformation has blurred the lines between consulting, IT services and agency services in M&A. Companies acquired complementary capabilities across the professional services spectrum rather than adding more of the same, and have evolved to meet the requirements of an increasingly digital world. As buyers became more sophisticated in their approach to and understanding of the M&A landscape, demand grew for business services and high-end advisory assets.

“…as clients look for one-stop-shop solutions, firms are shifting towards providing end-to-end capabilities, oftentimes acquiring these capabilities through M&A.” – Sonya Lu

Talent also took center stage in 2021 as businesses across the globe faced labor shortages and strong competition for qualified workers. For professional services companies, people are one of their most important assets, and successfully motivating, rewarding and ultimately retaining talent is key. Buyers placed a greater emphasis on human capital as they examined their own talent acquisition and retention strategies.

CGCS: As for 2022, what is your firm’s outlook for the coming year for the industry?

Sonya Lu: More than ever, professional services companies are immediately relevant to the market, providing essential services crucial to the success of many companies. There are certainly risk factors that merit consideration including supply chain disruptions, labor shortages and changing regulations, but the industry has maintained its momentum despite recent macroeconomic conditions. We are optimistic that professional and tech-enabled services will continue to garner interest and growth in the market. We expect to see the following trends in 2022:

First, is the idea of “one-stop-shop” solutions. Historically, consulting firms have focused on either strategy or implementation. However, as clients look for one-stop-shop solutions, firms are shifting towards providing end-to-end capabilities, oftentimes acquiring these capabilities through M&A. Bringing the spectrum of services under one umbrella introduces a few challenges but also opportunities to scale and better service clients.

Next, is digitalization. Technology will permeate nearly all aspects of business with firms leveraging automation, cloud and analytics to transform their processes and drive productivity. Services can be performed virtually via global workforces, all at better cost-efficiencies. Momentum behind emerging technologies motivates companies looking to incorporate blockchain and other next-generation services. With the prevalence of technology and digitalization, protection of information and potential regulatory scrutiny will be important considerations and firms will need to adjust accordingly.

“We expect 2022 [M&A] market drivers to include maintaining talent amidst the “Great Resignation”, continuing demand for next-gen capabilities and industry tail winds in the healthcare and life sciences vertical.” – Nathan Birhanu

Then we have a competition for talent. The demand for high quality talent continues to rise without expectations to abate any time soon. With the shift to virtual workplaces, companies can cast their nets globally and look to nontraditional hiring to fill talent gaps. However, organizations will likely need to increase overall pay with monetary compensation and retention mechanisms.

CGCS: What should we expect to see from the M&A market?

Nathan Birhanu:
Total M&A market deal value reached an all-time high of almost $6 trillion in 2021, with a corresponding all-time high of number of deals at approximately 63,000. These records were propelled by a pause of deals in the first half of the year that caused a slingshot effect as the M&A market made up for lost time. In addition, market fundamentals such as ample dry powder, digital acceleration driven by the pandemic, strong performance in public equities and cheap debt continued to be at play. This rare combination provided an unprecedented year for M&A in 2021. Although we don’t expect 2022 to break the records of 2021, we do expect many of the favorable trends we saw in 2021 to continue to roll into this year. We expect 2022 market drivers to include maintaining talent amidst the “Great Resignation”, continuing demand for next-gen capabilities and industry tail winds in the healthcare and life sciences vertical.

Business services and technology-enabled services firms were strongly impacted by the “Great Resignation”. Employees across the country and many parts of the world left their jobs in droves for several reasons (seeking new career paths, pursing passions, needing a break due to burn out, etc.). Although we expect attrition to slow, we don’t anticipate it coming back down to historic levels. To mitigate against a talent shortage, firms are using M&A to acquire new talent, abiding by the buy versus build formula in regards to human capital.

Also, the pandemic accelerated and heighted awareness for corporate digital agendas. Many organizations seek to leverage technology in any way possible to automate processes, increase efficiency and deliver more value. The structural shift to a remote workforce increases the demand for technologies to support ongoing business operations. Services firms able to deliver these capabilities efficiently will be in high demand, and many will leverage M&A to acquire these capabilities.

“Although transactions may not reach 2021 levels, we still expect PE firms to play a very active role in the 2022 M&A market.” – Nathan Birhanu

In 2022, expect continued tailwinds for the life sciences industry. Pharma continues to have significant M&A transaction value and volume. Demographic trends of aging population segments coupled with the persistence of COVID, make life sciences critical. Major pharmaceutical and biotech companies continue to make great strides, setting records in clinical trials, time to market and R&D spend. Business services and high-end consulting firms are expected to continue to expand their life sciences verticals to stay competitive.

Other significant factors affecting 2022 M&A trends may include geopolitical volatility, regulatory policies and changes in interest rate.

CGCS: 2021 was a boom year for venture capital and private equity activity, despite the ongoing pandemic. Should we expect that resiliency to remain steady in 2022?

Nathan Birhanu:
Private equity (PE), venture capital and SPACs accounted for nearly 50% of the total general M&A deal value in 2021, with PE transactions leading the pack. We anticipate M&A activity by financial investors to remain high throughout 2022 due to trends related to evolving LP allocations (i.e. troves of dry powder), continued acceleration of newly created PE firms and low yield providing cheap debt.

In 2021, institutional LPs continued to allocate increasing amounts of funding to financial sponsors, which has resulted in high volumes of dry powder needing to be deployed. Fueling this activity is a widespread decrease in the investment cycle, with some PE firms shortening the typical period from five years down to three. This is, in part, due to record valuations resulting in investors cashing out sooner, further catalyzing the entire cycle.

Additionally, the creation of new, active PE firms has grown year over year in the last decade, according to a McKinsey report, as investors see outsized returns in alternative assets. The creation of new firms seeking to establish platforms could be a major M&A driver in the coming years.

Finally, low yields provide sources of cheap debt; PE firms have capitalized on previous interest rate environment to use leverage to buy higher yielding corporate assets in listed equity markets to take companies private or augment returns in existing portfolio companies. Rate rises are currently expected to be moderate in 2022 with cost of debt capital anticipated to remain low.

The above trends fall within a broader and expanding PE industry where the business of investing in and selling businesses continues to be an established norm. Although transactions may not reach 2021 levels, we still expect PE firms to play a very active role in the 2022 M&A market.

About Clearsight Advisors

Clearsight Advisors is an investment banking firm dedicated to providing world-class M&A and capital raising solutions exclusively to growth-oriented Business Services and Technology companies. Clearsight combines deep market insights across software, services and data, to help entrepreneurs, private equity owners and board of directors successfully advance their vision. Clearsight Advisors, Inc. is a wholly owned subsidiary of Regions Financial Corporation. All securities are offered exclusively through Regions Securities LLC, a registered member of FINRA and SIPC. For more information please visit clearsightadvisors.com

Opinions represent the author or individual referenced opinion as of the date of the report and is not to be construed as: a personalized recommendation; a solicitation or an offer to buy or sell any securities or related financial instruments; legal, tax, financial or accounting advice. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.