Last year will be a very tough act to follow. M&A values and volumes soared on the back of confident public markets, strong deal financing options and a private equity industry flush with cash.

What follows are five key trends that will shape the direction of 2022.

1. Regulation lengthens deal processes

Regulatory scrutiny has so far failed to dampen M&A appetite, and we expect that to continue to be the case. However, it may slow down the progress of some deals. The M&A process has become more complex over the past year, as antitrust policy changes have extended the FTC's scope and timelines, the SEC has focused increasingly on enforcement actions and CFIUS has brought in additional resources to scrutinize deals involving overseas parties.

A more aggressive regulatory regime requires dealmakers to understand early on where there may be regulatory hurdles to clear. Dealmakers may need to potentially pre-empt these with filings at the terms sheet stage—and in the case of cross-border deals, consider the appropriateness of voluntary filings.

2. Interest rates start creeping up

Unprecedented stimulus packages put in place to counter the economic effects of the pandemic, plus a strong rebound in demand and supply chain issues, have all resulted in steep price increases, with inflation hitting levels not seen for decades. While this could be a temporary phenomenon caused by the release of pent-up demand accumulated during lockdowns, the pace of increase has caught some by surprise. Indeed, the Federal Reserve has already indicated that it is sharply reducing its monthly bond purchases. Its next move is likely to be on interest rates, with as many as three rises forecasted for 2022.

This clearly has an impact on the cost of deal financing and, depending on the pace and scale of interest rate rises, it may decelerate the M&A market somewhat. However, with interest rates very low by historical standards and significant dry powder among private equity funds, we expect the impact on deal flow to be relatively small, at least through 2022.

3. Energy transition drives deals

In the same way that digitalization has boosted technology M&A, the increased urgency around energy transition will create ever more opportunities for dealmakers in 2022. President Biden's US$1 trillion-plus infrastructure package prioritizes clean energy investment, and societal shifts are encouraging businesses to consider their role in mitigating or preventing climate change.

As a result, M&A involving liquefied natural gas assets and electric vehicle-related companies has already picked up. We anticipate that this will happen across the broader energy and infrastructure sectors, and we expect to see interest in clean tech increase significantly among investors and acquirers.

4. De-SPAC mergers will continue

After a record-breaking run for SPAC IPOs in 2021 (albeit at a more moderate pace from Q2 onwards), the race is on for sponsors to find attractive public-ready targets.

With a typical two-year period within which to find deals, competition for the best companies will be fierce, and we may see more sectors targeted beyond the white-hot technology and healthcare spaces.

De-SPACs could also provide a strong exit route for private equity and venture capital firms, and we may start to see triple-track sales processes that run the IPO, de-SPAC and M&A options alongside each other.

Yet, given the competition for deals, as we move toward the end of 2022, it is also likely that we will start to see some liquidations of SPACs that raised funds in H2 2020. That could usher in a welcome flight to quality in the SPAC market, with investors backing only experienced and high-quality sponsors. Increased regulatory scrutiny is also likely to raise the quality bar.

5. The possibility of a stock market correction looms large

It's a near certainty that the markets will correct at some point, but it's impossible to know when. New record highs were set in 2021, continuing a long-term upward trajectory that was interrupted relatively briefly by the precipitous fall and dramatic recovery following the global outbreak of COVID-19 in 2020. There was some volatility in the third quarter of the year, but 2021 closed well above 2020, even as COVID-19 figures ticked upwards through December. Dealmakers will be watching closely for signs of a change in direction. Some might be particularly eager to act before markets turn, while others may be more wary of pursuing deals if they expect a significant change in the short term. But every dealmaker knows that what goes up must come down, at some point and to some extent—and the maxim's urgency will only intensify the longer markets maintain their highs.

There are clearly some risks on the horizon—inflation, interest rate rises and the potential for a stock market correction. There is also the possibility of further lockdowns as new COVID-19 variants emerge, with the rapid spread of the Omicron variant at the end of 2021 a sign of how new strains can sow chaos even in highly vaccinated countries. However, these risks are baked into many deals and the market has shown that stay-at-home orders have had little effect on dealmaking appetite. There is also increasing optimism that the Omicron variant may signal the beginning of the end of the pandemic. As a result, we believe that conditions remain in place for continued high dealmaking activity, at least for the first half of the year and potentially well beyond.

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