Who would’ve predicted we would enter another year preparing for a spectator-less Olympics, seeing record amounts of dry powder in private equity and debt funds, and debating the merits of SPACs? As Yankee legend, Yogi Berra once allegedly said, “It’s like déjà vu all over again.”
With a month behind us already – where does the time go? – here are some things we’re watching for in 2022:
D2C companies will need to be highly profitable to attract strong valuations.
Last year, our “Five Things” 2021 outlook put a spotlight on eCommerce. We were spot on with that one, and 2021 should probably be called “The Year of the Amazon Aggregator”, as billions in equity and debt dollars piled into the likes of Thrasio, Razor, Heyday and others. The proliferation of these aggregators has created a significant pool of buyers for eCommerce brands large and small. That said, these buyers aren’t known for paying high prices, so while they provide a safe landing option for brands – even those with losses or small profits – those who want yesterday’s nosebleed valuations need to put up more than revenue growth on the scoreboard. Private equity growth and strategic buyers are increasingly selective and we expect that 2022 will see most eCommerce deals valued on EBITDA multiples rather than revenue ones.
Direct lenders as equity partners.
The proliferation of private debt funds has been well documented. In what is now a $1 trillion market, competition is fierce to win over the hearts of borrowers and deploy assets. To differentiate themselves – and boost yields to investors in a tight market – many of these direct lenders are offering, or in some cases, begging, to invest equity alongside their loans. We have seen this request in virtually all the financings we have completed in the past few months and expect that this is just the beginning.
AUM is king…continued consolidation in the credit asset manager space.
To continue on the theme of the cutthroat private debt space, 2021 ended with a bang for Oak Hill Advisors, a debt-focused asset manager that was acquired by $4.2 billion by T. Rowe Price. The more assets under management, the more economies of scale for firms like Oak Hill, and we would not be surprised to see more multi-billion dollar deals in the sector this year.
SOFR, so good.
While we were not able to fully shake COVID in 2021, we did finally see the sunsetting of LIBOR, as noted in its New York Times “obituary.” While we are having a bit of a chuckle explaining SOFR and SOFR floors to our debt capital raise clients, we do not envision the transition away from LIBOR to be too painful, nor do we think this will have a meaningful impact in either direction for borrowers’ cost of capital and lenders’ yields.
2021 was the year when ESG – Environmental, Social, and Governance – went mainstream. Asset managers clamored to set up ETFs and private vehicles focused on ESG investing. Going forward, ESG will permeate every aspect of investing and investors will not need to seek out ESG funds to know that their dollars are aligned with the greater good; market forces will actually demand it. As Blackrock CEO and founder Larry Fink said recently in his annual letter to CEOs, “Stakeholder capitalism is not about politics…It is not ‘woke,’…It is capitalism.”
Let us hope that when we meet again next year, we will be reflecting back on a Rams Super Bowl victory and a successful and healthy 2022 for our clients, customers, partners and friends.