Deal activity in the second quarter of 2021 continued at the feverish pace seen in the previous two quarters, driven by the continued economic recovery, favorable cost of debt, high levels of dry powder and a strengthening job market.

The continued economic recovery has driven valuation multiples back toward prepandemic levels. As the vaccinated population increases and consumer sentiment continues to improve, the M&A market — as well as the economy as a whole — experienced continuous rebounds.

While 2020 M&A activity finished well below historic levels, a strong performance through the first half of 2021 indicates a surge in M&A activity to come for the rest of the year.

M&A activity

U.S. deal activity has been supported by a combination of macroeconomic factors driving M&A. The COVID-19 vaccination production and distribution efforts — coupled with an expansive economic stimulus plan with the Biden Administration's $1.9 trillion stimulus package as its cornerstone — have added to the economic momentum. Notably, the proposed tax hikes drove some companies to rush to complete deals before proceeds get taxed at a higher rate.

PitchBook reports that the North American deal market closed 8,193 deals through Q2 2021, accounting for $1.12 trillion in value. This represents a year-over-year increase of 8.0% in deal volume and 24.1% in deal value.

In aggregate, middle-market valuations rose steadily from 6.9x EBITDA in Q1 2021 to 7.2x EBITDA in Q2 2021, as reported by GF Data in its quarterly M&A report. The valuation increase between Q1 and Q2 was primarily led by the $100-$250 million enterprise value range, increasing from 7.9x EBITDA to 9.5x EBITDA. Furthermore, the only enterprise value range that did not increase between the two quarters was the $10-$25 million range.

Consistent with previous quarters, size continued to be a significant driver of valuation. Transactions in the $10-$25 million range averaged a 5.7x EBITDA multiple, and deals in the $100-$250 million range averaged a multiple of 9.5x in Q2 2021.

Total debt multiples have been steadily rising since the beginning of the COVID-19 pandemic, increasing from 3.3x EBITDA in Q2 2020 to 3.7x EBITDA in Q2 2021, consistent with the average debt load over the past two years. This trend is consistent with senior debt multiples, which are up from 2.7x EBITDA in Q2 2020 to 2.9x EBITDA in Q2 2021.

In Q4 2020 and Q1 2021, subordinated debt compressed to about half a turn of average capital structure. In Q2 2021, subordinated debt accounts for 0.8x of the typical capital structure, which is more in line with pre-pandemic levels.

Looking forward at the remainder of 2021

The pandemic has prompted businesses to thoroughly examine their assets and determine where their core competencies lie and where to find growth. As evidenced by the increase in deal volume in 2021, new deals are still getting done despite the uncertainties in the marketplace. Deals are being launched on a selective basis, and many in-process deals continue to move forward with careful consideration given to timing, process design, deal structure and valuation expectations.

Wipfli Corporate Finance Advisors anticipates that valuations and deal activity will continue to move toward pre-pandemic levels as we continue through Q3 2021. With that in mind, preparation for sale should begin now. Buyers will look through the financial impact of COVID-19 and will focus on the ability to rebound.

Additionally, buyers will become more aggressive as levels of dry powder remain at all-time highs. Markets are working towards an equilibrium, and a new “normal” is beginning to emerge. WCF stands by, ready to help clients navigate this turbulence.