The volume and size of M&A deals and private equity investments declined in the second quarter of 2022. That’s according to a new report by the legal firm White & Case.

PE investors announced a total of $436.3 billion in deals during the three-month period ended in June 2022. That’s 15 percent higher than the previous quarter but a staggering 29 percent lower than the second quarter of 2021. Deal volume also declined 28 percent year on year.

The White & Case report points to rising interest rates and rampant inflation creating a tighter financing environment for private deals. These factors seem to be trickling down to the middle market too.

“M&A in the middle market has remained strong through the first two quarters of 2022,” says Dean D’Angelo, partner at Stellus Capital Management. “But we are witnessing both private equity firms and debt providers approaching the market more cautiously as signs of a slowdown increase and rates rise.”

James Andersen, managing partner, and co-founder of Clearview Capital agrees. “Inflation is rampant for the first time in the careers of the majority of investors, a sharp slowdown is underway and geopolitical risk remains exceptionally high. So it’s not surprising that last year’s frenetic pace of dealmaking has abated,” he says.

The slowdown is expected to last for the rest of the year. Inflation, interest rates, and a lack of liquidity could persist, while White & Case also expects U.S. regulators to tighten their scrutiny of the domestic PE sector. These headwinds could further diminish dealmaking activity across the global economy.

“We expect activity to be somewhat muted for the remainder of the year,” says D’Angelo.

Despite these conditions, there was hope in some sectors. The White & Case report found dealmaking activity in renewable energy, automotive technology, and the tech sector was still robust. D’Angelo says there is “a strong appetite, for both new platforms and add-ons, for well-structured deals with stable, non-cyclical businesses.”

“Times like these always eventually lead to good buying opportunities,” adds Clearview’s Andersen.

-Vishesh Raisinghani