What are the trends, risks, and opportunities in 2022?
As dealmakers recover from a record-breaking 2021, we expect another busy year in 2022. While risks in the financing market, the tightening of the regulatory environment, and the continuing impact of COVID-19 could have a moderating effect, macro-factors remain favorable for a steady pace of deal activity.
Several factors will impact the financing market in 2022. COVID and inflation are factors that cannot be controlled, are unpredictable, and pose the greatest risk. The market expected COVID to dissipate by 2022, and it has not. There were many businesses that adopted temporary measures for their balance sheets that will be tested in 2022 by the prolonged fight against COVID. The world grew complacent on inflation because it has been missing from the markets for about 30 years. It adds a new and real challenge for 2022. Interest rates are another challenge as the market had expectations of a very measured approach to interest rate increases that inflation may change.
Challenges aside, a number of factors will drive dealmaking in 2022. We anticipate renewed cross-border activity as travel restrictions ease and the pandemic effects become normalized. Technology will remain a key driver for M&A. We expect 2022 to begin a long-term trend of PE sponsor-led take-privates for mid-market companies that went public via SPACs over the last few years, as it becomes clear that many of those companies were not ready for the spotlight of the public markets. Mega deals may not happen with the frequency of 2021, but the combination of dry powder and shareholder activism will continue to drive M&A. Finally, ESG. It is hard to overstate how quickly and how important this has become a factor in the market. We expect to see an increasing number of transactions tied to ESG strategies.
In the real estate sector, we expect the trends of 2021 to continue in 2022, including interest in "alternative" investments—investments requiring high levels of service alongside space, such as data centers and temperature-controlled warehouses, and "thematic" investments, such as e-commerce/supply chain, residential (including single-family rental), and life science/biotech. Focus on ESG factors is increasing here as well, as real estate is being used to help investors and tenants reach their sustainability goals. Out-of-favor sectors, such as office, enclosed retail, and hospitality, will continue to face challenges in 2022 as the risks mentioned above—COVID, inflation, interest rate hikes—slow momentum.
In the bankruptcy arena, the uptick in refinancing activity over the last year may have temporarily abated concerns from investors. In 2022, uncertainty regarding the pandemic's impact on market demand, inflation, and government intervention will all factor into whether high-yield issuances remain steady or continue to slow. This will likely impact some borrowers' ability to service their existing debt. As maturities on high-yield debt and leveraged loans become due, private credit will likely continue to expand. Private lenders will continue utilizing loan-to-own strategies, which anticipates a thawing out of the post-pandemic restructuring freeze.
Overall, we expect 2022, like last year, to be active and dynamic from a dealmaking perspective but not without its challenges.
Read the full 2021 Transactional Year in Review and 2022 Forecast.
