While 2021 is likely to maintain many of last year’s traits of economic, political and public health uncertainty, many dealmakers are seeing greener grass ahead in the M&A space. Several trends have combined to create tailwinds for the marketplace—with corporates sitting on record levels of cash, the debt market in good shape and private equity sponsors still grappling with how to deploy dry powder.
That optimism is reflected in results from the recent 2021 BDO Middle Market CFO Outlook Survey, which polled 600 middle market CFOs in the United States.
While most middle market companies anticipate 2021 will bring financial growth and broad economic recovery, their expectations follow a year of steep declines in revenue for many. For some companies, growth may mean a return to pre-pandemic financial performance rather than reaching new levels, but most believe the deepest hardship is over.
Whether those CFOs identify their businesses as thriving, surviving or struggling today, their outlook for a year from now is overwhelmingly positive.
Deal flow saw highs and lows in 2020. A strong start in Q1 shifted to a pause in Q2 as many businesses and investors braced for the initial impact of the Covid-19 pandemic. But Q3 saw the floodgates open as buyers and sellers returned to the table to close deals prior to the end of the year, driven in large part by ample access to capital and concerns about changes in political leadership and tax policy following the November elections. Uncertainty in the economic outlook for 2021 also drove seller motivation to close deals in 2020.
Despite this uncertainty about the 2021 outlook, many middle market CFOs plan to proceed with deals to aid in growing their business—with 29% seeking PE investment, 24% planning a merger or acquisition and 20% of private companies planning to pursue an IPO. Choosing the best path for growth will depend on the alignment of priorities between buyer and seller, or company and investor, along with an accurate view of a company’s risk profile and future opportunities. Conducting a thorough analysis of financial data can help identify those future opportunities and assess how best to unlock value.
An assessment of the 2021 deal landscape would be incomplete without addressing special purpose acquisition companies (SPACs). We’re in the midst of a SPAC surge. According to Dealogic, U.S.-listed SPACs raised $82 billion in 2020, a sixfold increase from 2019. Sparking that popularity, particularly in the current climate, is the prospect of a simpler and lower-risk process for companies considering an IPO. For every great IPO success story, there is an equally significant failure. In a volatile environment, the SPAC path to late-stage funding through a party-to-party diligence and negotiation process is likely more attractive than a roadshow with considerable pre-IPO scrutiny.
Despite the feeling of turning over a new leaf from 2020, the reality is that this year will bring an acceleration of trends that started to really pick up in the second half of last year. There will be more uncertainty and more change to come, but dealmakers are ready for the challenge and see a brighter future ahead.