Prairie Middle Market Perspective Spring 2022

The extraordinary 2021 M&A market saw record levels of middlemarket deal activity, even with significant transaction processing constraints toward the end of the year. Deal resources including quality of earnings accountants, representation & warranty insurance providers, lawyers and even investment banker time were in scarce supply. The whole deal community shifted to close the deals already in process rather make new business pitches and prioritized higher-quality, larger deals over smaller, lowerquality deals. This produced a new business “backlog” that was supposed to prime the 2022 M&A market and sustain the M&A bull market. 

While 2022 had strong prospects to be another record year in middle-market M&A, economic and business uncertainty has increased significantly and seems to have already affected the deal market. Economic uncertainty started in 2021, as the unexpectedly robust post-pandemic recovery and excessive government stimulus spending created outsized demand for goods and services. This resulted in shortages across all sectors of the economy, logistical bottle necks and supply chain issues. Scarce labor across the economy led to pay increases to attract workers and wage inflation. The supply chain issues and shortages led to increased costs of almost all raw material inputs, further exacerbating the inflationary environment. Increased global demand for energy in the post-pandemic environment, coupled with an intentional move to place greater reliance by the U.S. on foreign energy sources, led to further domestic inflationary pressure from higher energy costs. By the end of 2021, U.S. inflation was at a 40-year high. While this inflation was dubbed “transitory” in early 2021, it soon became apparent that many costs, like wage increases, were more permanent in nature, creating a complicated, persistent inflation problem. The Russian invasion of Ukraine, new 2022 COVID-19 lockdowns in China and an increasing trend towards “reshoring” in the U.S. will further complicate the U.S. inflation problem in 2022 with the anticipated additional energy market and global supply chain disruptions.

The U.S. Economy remains strong but is facing headwinds because of inflation, raw material shortages, labor availability and other issues. The March 2022 Jobs report showed significant jobs growth. However, total U.S. employment remains below the pre-pandemic levels the unemployment rate and number of people employed is still not at the levels of late 2019. Further, the March average annual wage growth of 5.6% is well below the March annual average Consumer Price Index of 8.3%, meaning the workforce lost ground on purchasing power because of inflation. Consumer spending drives around 70.0% of the U.S. economy, so real wage growth and employment are important factors. According to Reuters, even with record amounts of savings, U.S. consumer spending was flat in February, largely due to inflation-induced price pressures and concerns about the future. The March Michigan Consumer Sentiment survey was 59.4, the lowest reading since August 2011. Reduced living standards due to inflation was listed as the primary cause of consumer pessimism. Further, the March 2022 Ipsos Right Direction/Wrong Track polling data showed that 61.0% of the sample thinks the U.S. is on the wrong track with the economy and indicated jobs as the survey participants’ major concern. Clearly, the consumer is becoming worried about the future, which does not bode well for the economy.

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