2021 Year in Review and 2022 Outlook

2021 has officially drawn to a close and what a year it was for technology dealmaking. Strong capital availability and a supportive macroeconomic backdrop is a short list of some of the factors that helped produce record levels of transaction activity and strong gains in the broader public markets. In this blog post, we provide a year in review and offer our 2022 outlook for technology M&A, VC, and public equities.

M&A Market Overview

In 2021, the North American software M&A market accounted for US$282.4bn capital invested across 2,265 transactions (Figure 1). Large amounts of dry powder, low interest rates, and the resilience shown by software business models through the pandemic all helped contribute to this record level of deal activity. Additionally, the abundance of capital and limited number of high-quality prospective software targets pushed valuations to record levels, as shown by a median enterprise value to revenue multiple of 5.8x (Figure 2).

Figure 1: North American Software M&A Market

Figure 2: Median Enterprise Value / Revenue Multiples

We continue to be asked whether this level of M&A activity will be able to sustain through 2022. Despite signals of tightening liquidity and potential tax increases, it is our view that 2022 will remain very active and continue to produce 125+ software M&A transactions per month. We also expect to see the 75th percentile of revenue valuation multiples expand further from the 25th percentile as a result of there being fewer attractive software assets available for purchase. 2022 will bring many opportunities as emerging technologies gain further adoption and executives continue to look for ways to future-proof their businesses.

VC Market Overview

In 2021, the North American software VC market accounted for US$128.5bn capital invested across 7,536 transactions (Figure 3). Similar to the software M&A market, a favourable macroeconomic environment and an impressive fundraising pace helped produce record levels of investment activity. Further contributing to the heightened activity seen in 2021 is the growing appetite among VC investors to participate in mega rounds exceeding US$100mm in deal size across the mid and late stages (Figure 4).

 Figure 3: North American Software VC Market

Figure 4: VC Mega Rounds Exceeding US$100mm

With the current level of fundraising and large amounts of dry powder on the sidelines, we expect the record rate of VC investment activity achieved in 2021 to continue well into 2022. As a result of the prevailing market dynamics described above, we also expect VC investments in the software industry to become increasingly concentrated among a select group of investors willing to pay lofty multiples. For example, in 2021, the top six investors completed 921 investments while in 2020, the top six investors completed 692, representing outsized growth when compared to the entire software VC market.

Public Equities Overview

 As part of our monthly market reports, we report on the performance of the S&P 500 which gained an impressive 28.8% through 2021 (Figure 5). Aside from a few brief sell-offs, corporate earnings reached record levels, helping investor sentiment remain largely optimistic throughout the year. We also report on the performance of software-related indices that we’ve created using relevant SaaS and non-SaaS constituents. In 2021, our SaaS and non-SaaS indices increased 8.4% and 23.8%, respectively, representing strong gains but an underperformance relative to the broader market.

Already stretched valuations within the technology sector and short-term macroeconomic policy raise a lot of questions for the year ahead. As highlighted in our most recent blog post “Public Software Balloons?”, the key performance indicators and growth metrics of some notable software companies do not support the valuations that they fetched in the public markets during 2021. Also, high inflation has the potential to increase borrowing and input costs in the near-term adding further uncertainty. It will also be interesting to see whether the technology IPO market remains active in 2022 due to anticipated private-equity backed exits and the growth of SPACs.

Figure 5: Performance of Stock Indices

Conclusion

We remain very optimistic about technology dealmaking opportunities in 2022. Volatility is expected to impact the public markets due to current inflation rates, but we believe record amounts of dry powder will continue to drive the levels of M&A and VC activity achieved in 2021. We look forward to helping our clients navigate the volatility and many opportunities that will be present during the upcoming year. 

Written by Trent Pora of Sampford Advisors

About Sampford Advisors

Sampford Advisors is a boutique investment bank exclusively focused on mid-market mergers and acquisitions (M&A) for technology, media and telecom (TMT) companies. We have offices in Toronto, ON, Ottawa, ON, and Austin, TX and have done more Canadian mid-market tech M&A transactions than any other adviser.

Photo by Behnam Norouzi