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Capstone Partners Q1 2022 Capital Markets Update

Middle Market M&A Remains Steady Despite Economic Uncertainty

Capstone’s Capital Markets Update Q1 2022 reports that the mergers and acquisitions (M&A) market has finally showed signs of stabilizing following two years of unpredictable activity, however, unfolding economic uncertainty might still halt normalization. Over the past two years we have seen drastic swings in M&A activity, as business owners have combated COVID-19, supply chain disruptions, and now elevated levels of inflation. The pandemic decimated transaction volume in 2020, with total deal volume falling 16.4% from 2019 as many businesses went into survival mode—bringing a temporary pause to M&A activity. As prospective sellers emerged from the pandemic, they were met with a fervent pool of buyers ready to deploy capital to make up for lost time. 2021 subsequently packed three years’ worth of dealmaking into one, and middle market transaction volume reached its highest level in seven years, rising 34.1% from 2020. Q4 2021 proved to be a historic quarter with dealmakers and third-party M&A service providers encountering severe capacity constraints amid a flood of transactions. Capstone experienced this surge firsthand, with our deal closings in Q4 surpassing any quarter in our database.

Following a historic M&A market in 2021, middle market deal activity has returned to more normalized levels through Q1 2022 with transaction volume increasing 0.1% year-over-year (YOY). While the frenetic pace of M&A activity experienced in the second half of 2021 may be in the rearview, the market remains healthy for middle market business owners. By historic standards, the Q1 deal count of 3,789 closed transactions outpaced the pre-COVID five-year quarterly average of approximately 2,470 deals. However, headwinds cannot be ignored— Russia’s war on Ukraine, rising interest rates, and elevated global inflation present significant challenges for the market. Notably, business owners in Capstone’s Middle Market Business Owners’ Survey have communicated uncertainty regarding the economy, with the percentage of owners holding a positive economic outlook dropping from 59.3% in Q1 to 44.2% for Q2. Despite challenges ahead, business owners still plan to pursue inorganic growth, with 29.3% planning to engage in acquisitions, an increase from both  Q1 2022 and Q4 2021. Debt and equity financing also remain a top agenda item for executives, with 31.9% planning to secure additional capital, surpassing prior survey results.

Valuations declined a full turn in Q1 to an average of 9.6x EBITDA compared to the full-year 2021 average of 10.7x. However, quality businesses are still receiving high bids from a competitive group of buyers. In addition, the high multiple in 2021 was largely driven by a widespread flight to quality with only the top assets trading, partly due to dealmakers and buyers facing heavy capacity constraints. Notably, larger deals have shown greater insulation from a moderating valuation environment through Q1 2022 with transactions between $250 and $500 million in enterprise value recording an average EBITDA multiple of 13.6x compared to 11.7x in full-year 2021. In addition, middle market valuations have greatly varied across industries, as discussed in Capstone’s Middle Market M&A Valuations Index. The Technology, Media & Telecom (TMT) space has continued to lead M&A pricing with a three-year average multiple of 13.3x EBITDA. As we continue to operate in an inflationary environment, margins and operating efficiency will likely be increasingly emphasized in M&A processes in the near term.

M&A volume among strategic buyers has declined compared to Q1 2021 although the average transaction value for acquisitions by public and private strategic buyers rose 26.2% and 34.2% YOY in Q1, respectively. Balance sheets and liquidity positions of strategics remain healthy, which offers encouraging prospects for sustained consolidation. Supply chain strength has been a key focus over the past 24 months which will likely be a driving force for acquisitions in the near term.

Private equity (PE) firms continue to possess the luxury of vast levels of dry powder ready to be deployed into investment opportunities. However, the buying spree exhibited in 2021 has certainly slowed with middle market transactions closed by PE firms falling nearly 37% YOY in Q1. Target company growth profiles will be intensely scrutinized through the lens of an economic downturn, as sponsors seek recession resilient businesses that can generate healthy internal rates of return upon exit. Valuations paid by private equity have held strong, amounting to an average of 7.3x EBITDA in Q1 2022, matching the full year 2021 average, according to GF Data.1 Healthy valuations have been supported by an accommodative debt environment, with average debt multiples settling at 3.9x EBITDA in Q1, nearly mirroring the full year 2021 average of 4.0x.

As the weather turned warm in 2022, sponsors noted a chill in new deal-flow both in volume and quality. The confluence of inflation, supply chain issues, and capital markets turbulence have prompted private equity sellers to pause their paths to exits. Meanwhile, they scour their existing portfolios for signs of financial softness and new investments for cyclicality.

Brendan BurkeHead of Sponsor Coverage, Capstone Partners

Economic uncertainties will persist over the next several months, with market participants keenly monitoring the Federal Reserve’s monetary policy actions. While it may be too early to decipher how the evolving economic climate will impact the direction of valuations and volumes for the remainder of the year, one fundamental driver of M&A is guaranteed—a significant portion of transaction inventory will be motivated predominately by demographics, as aging business owners increasingly seek a liquidity event. In addition, the mountain of private equity dry powder, pandemic fatigued CEOs, and talks of recession on the horizon may make the current window an optimal time for many to pursue an exit, fueling a healthy M&A environment through 2022.






  1. GF Data®, “GF Data® M&A Report,”, accessed July 1, 2022.

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