Rick Lacher, Managing Director at investment bank Houlihan Lokey, discusses his 2022 dealmaking predictions for the Americas.
At some point, there’s going to be a bump in the road. I don’t think anybody can predict what that might be.Rick Lacher, Managing Director, Houlihan Lokey
Ansarada: Let’s start by rolling back the calendar. The second half of 2020 and first half of 2021 has seen large amounts of M&A activity – higher than pre-pandemic. Do you think this level of deal activity will continue in 2022?
Rick Lacher: Yes, I do. Dealmaking activity has, in essence, been on an upward climb since the summer of 2009. This was stopped by the outbreak of COVID with April, May and June being particularly slow months for dealmaking before a resurgence in activity around the fall. Dealmakers are now very comfortable carrying out transactions in a COVID world, which has resulted in the record activity we have seen. The M&A business has just been booming, and there’s nothing on the horizon that suggests it’s going to slow down. The equity, capital and debt markets are in great shape and there’s a lot of capital chasing deals. I think if you talk to anybody in our business, they’ll say that 2022 is likely to be better
Ansarada: That’s excellent news. Are there any particular sectors that you feel will be especially active?
Rick Lacher: If you look at the stats, the US technology sector is clearly dominant, both in terms of the number and value of transactions, which is nearly double that of the next major industry group, healthcare. Based on transaction size, activity within the financial services and energy sectors is also robust.
Ansarada: The COVID-19 pandemic has been severely disruptive to sectors such as leisure and travel. What do you expect will happen in these sectors, in terms of M&A? Will we see an increase in distressed activity?
Rick Lacher: That’s an interesting question. We have been involved in a number of restructurings within the travel industry and saw a substantial increase in restructuring activity in March, April and May last year. This activity has now slowed substantially. As there’s so much capital available, people have been able to buy their way out of trouble.
Where I’m based in Dallas, Southwest Airlines – a very large carrier in the US – has announced that it’s going to cut back substantially on its schedule. I know it is having challenges on attracting employees, whether it’s pilots or flight attendants. American Airlines has also had all sorts of issues on that front and has cancelled a number of flights just because it can’t get crews. It’ll be interesting to see whether those trends continue.
Ansarada: On the private equity side, fundraising activity has been tremendously robust. Do you expect levels to remain strong?
Rick Lacher: It’s been crazy. If you look at the Blackstone, KKRs, TPGs and Apollos of this world, they’re asset management machines and are raising capital through all sorts of different strategies. On the tech side, the likes of Thoma Bravo and Vista are raising US$20 billion plus funds. You’re seeing them lead a number of go-privates – given the amount of capital available, this is going to continue.
Ansarada: Absolutely. Like traditional M&A, the PE sector has been extremely busy. Do you believe that PE funds will be more focused on exits or on the buyout market?
Rick Lacher: If you think about the structure of a PE fund, you ultimately make money by investing in good companies and building those companies up, but you also make money by raising funds. One way to raise more funds is deploy the cash that you already have. If you want to go out and raise your next fund, you have to show institutional investors that you know how to put money to work. So as a result, it wouldn’t surprise me if the level of buying just continues to grow because the need to deploy capital feeds the engine.
One interesting trend we’re seeing is the growth in continuation funds. If a PE firm thinks a portfolio company still has potential, rather than selling a portfolio company, you can raise money to continue your ownership after the end of the fund, and we’re seeing more and more of that.
Ansarada: Do you expect financing conditions to become tighter next year?
Rick Lacher: Default rates were down 0.9% in the second quarter of this year. This, generally, is a good indication of where the debt markets are. If people are not defaulting, lenders are willing to lend and we saw a tremendous increase in financing last year. Businesses are taking advantage of the market and making sure they have cash on their balance sheet again. At some point, there’s going to be a bump in the road. I don’t think anybody can predict what that might be.
Ansarada: Looking ahead, do you expect the COVID-19 pandemic to continue to influence deal activity? Or do you think the risks can be largely mitigated?
Rick Lacher: That’s a tough question because there are so many different features at play. In the M&A world, at least, I think that we have gotten used to pandemic-related disruption. We were able to shift operations remotely with relative ease. I think, barring a substantial increase in the number and severity of cases, we’re going to soldier through it. It seems until you start having issues such as shutting down parts of the economy, which we are not seeing, it will be business as usual. I am optimistic that the COVID-19 pandemic at some point during 2022 will be mostly behind us.