Dealmaking momentum is expected to continue in the new year after a banner 2021 for private equity. In our outlook for 2022, we see several themes that are expected to play a significant role in PE investments: workforce management, infrastructure, ESG, home healthcare, business travel and new technologies, like cryptocurrency. We also predict that supply chain disruptions will continue to provide PE with opportunities. See below for a sector deep-dive on cryptocurrency.

Crypto exploded in 2021. Now get ready for a mergers and acquisitions boom. For the better part of the past decade, blockchain has been joined at the hip with Bitcoin, the largest digital asset and distributed ledger technology’s best-known use-case. But over the past 18 months, a rich, diverse crop of blockchain sub-genres has proliferated, from non-fungible tokens (NFTs) to decentralized finance (DeFi) applications, as well as tokens tied to projects connected with gaming, streaming, crowdfunding and now the metaverse.

Meanwhile, across the wider corporate landscape, particularly in financial services, the writing is on the wall – and in-house engineering talent is out the door, having decamped for crypto-native startups.

Tony Scuderi, CEO, Co-Founder, Imperii Partners

“I think in the next 12 to 24 months, we’re going to see a major boom in enterprise M&A with respect to crypto,” said Tony Scuderi, CEO and co-founder of crypto-focused investment bank, Imperii Partners. “Organic growth and ‘acqui-hire’ strategies are not going to cut it.”

Dealmakers from a wide spectrum of traditional sectors are beating a path to Imperii’s doorstep, said Scuderi, who, prior to starting his Bay Area firm in August of 2019, spent more than a decade at Keefe, Bruyette & Woods Inc.

Crypto certainly has come a long way. In early December, the industry got its own Congressional hearing, with Democrats emphasizing systemic risk and the potential for consumer harm; for C-SPAN viewers it became something of a Berlitz course.

One person who gave testimony was Brian Brooks, former acting comptroller of the currency under President Trump and who is now chief executive of blockchain technology provider Bitfury.

“I don’t know why we believe that incumbent institutions are risk-free and anything new is highly risky,” he said. “The problem is we treat crypto differently from other assets. The answer is just to recognize them for what they are. These are assets that represent some underlying activity.”

To get a sense of the breadth of the opportunity set, consider how far crypto at large has come in transcending Bitcoin (although BTC is hard to ignore, going from $20,000 last year at this time to as high as $69,000 in November before falling below $50,000 as of press time).

Blockchain-ecosystem creation network, Ethereum, has played second fiddle to Bitcoin, which, while the biggest and best-known computational node network, is just one single network. Ethereum has birthed dozens of parallel universes, trying to be Bitcoin only scalable. Ethereum runs on smart contract technology, allowing different software applications to communicate in a common language, so that developers can create autonomous networks to do (possibly disrupt) literally almost anything.

Sticking with finance, new DeFi platforms can support payments, lending, borrowing, securitization and trading. These platforms rely on (for security, computing power, financial backing) communities of crypto traders and developers who collectively pledge digital assets (known as staking) to the tune of $250 billion in “total value locked” (TVL), a collateral pool equivalent of a mid-sized American bank.

The same smart contract technology associated with Ethereum and rivals, such as the Solana, Cardano and Avalanche networks, is what allows for the minting and auctioning of NFTs, which are tokenized one-of-a-kind items, from pop art to pro wrestling memorabilia, and which took the world by storm in 2021. Tomorrow’s next big NFT platform will run on a network that may not yet even have been created (or, more likely, on Ethereum).

For a sense of the digital money dance card as it is being formulated, look no further than the old-guard asset management industry, heading full-bore into crypto.

Demand for crypto is skyrocketing. Billions of U.S. dollars are seen as bound for crypto fund products. Gargantuan Fidelity Investments, for example, just launched a BTC exchange-traded product (ETP) in Canada. And thus, interest in digital asset custody is surging.

In December, private equity titan KKR & Co. led an investment round in digital asset bank Anchorage, valuing the bank at over $3 billion. It would appear KKR is betting that this sector is bound to take off with traditional custodians (Bank of New York Mellon, State Street Corp, J.P. Morgan and Citigroup, to name a few) likely to enter the fray.

Bloomberg Law has tracked, year to date as of mid-October, 577 deals involving at least one party with “crypto” included in its entity description, including pending, announced and closed deals. That 577 is an all-time high since crypto deals first began popping up in 2017. The aggregate value of these 2021 YTD deals: $25.5 billion, also a record. Fifteen billion dollars of that is venture capital. VC in crypto was $3 billion in 2020.

Andrew Gerlach, Partner, Sullivan & Cromwell

Further, possibly even explosive, growth in crypto/blockchain-related acquisitions is not a far-fetched scenario looking ahead, industry members said.

“We are seeing a significant amount of interest in this area not only from existing players in the crypto market, but also traditional financial services organizations and well-established private equity and other investors,” said Andrew Gerlach, who is a partner in Sullivan & Cromwell’s Mergers and Acquisitions Group.

For traditional financial services businesses, the general consensus is that this crypto thing has legs.

“These companies now realize that as an asset class crypto is here to stay, in some form or another,” Gerlach said. “And that they have some catching up to do.”

Coming soon in Mergers & Acquisitions’ M&A Outlook 2022 series: