The Federal Reserve has continued its aggressive monetary policy tightening by increasing the federal funds rate again in November, adding 75 basis points to a target of 3.75-4.00. The Fed anticipates ongoing interest rate increases that are “sufficiently restrictive” to revert inflation to historical levels of 2 percent as it monitors conditions to assess the future magnitude of rate increases.

From an M&A perspective, an aggressively increasing interest rate environment has strengthened headwinds in an already gusty market. Interest rates, compared to the last several years, have become a greater challenge for transaction financing. Private equity groups in particular now face higher borrowing costs on buyout transactions. From a structuring standpoint, private equity groups have countered by increasing the portion of equity placed into deals to better manage the cost of debt. According to PitchBook, as of September 30, 2022, disclosed U.S. private equity transactions with valuations ranging from $25 million to $100 million and $100 million to $500 million had to place some 65 percent and 45 percent of equity-to-debt into transactions, respectively, which is 5 percent to 10 percent higher than the level placed in 2021. From MelCap Partner’s perspective in the middle-market, we have closed transactions with private equity groups structuring deals with upwards of 50 percent of equity-to-debt given the increasing interest rate environment.

The private equity market continues to display a flight to quality for top-tier businesses because of the historic levels of capital, including pent-up dry powder (known as private equity overhang) and committed fund requirements. As of September 30, 2022, private equity transactions with Enterprise Value-to-EBITDA multiples with valuations of $25 million to $100 million and $100 million to $500 million increased by 36 percent to 40 percent, respectively, when compared to 2021 according to PitchBook. As a result, top-tier businesses continue to command premium valuations.


M&A Market Activity

U.S. transactions volume for the 10 months ended October 31, 2022 was 7.9 percent lower than the same period in 2021, while deal volume for the month of October 2022 remained relatively flat, with activity 0.2 percent lower than the prior month as market headwinds prevail.

Transaction volume in the Northeast Ohio M&A market for the 10 months ended October 31, 2022 was 6.1 percent lower than the same time period in 2021. However, compared to pre-COVID levels, transaction volume for the 10 months ended October 31, 2022 was 6.6 percent higher than the same time period in 2019. Similarly, October 2022 transaction volume was 9.7 percent higher than October 2021.

Despite market challenges, Northeast Ohio saw the closing of several noteworthy transactions both from strategic and private equity acquirers. Local companies, such as Streetsboro-based Aurora Plastics, Lisbon-based BrightPet Nutrition Group, Tallmadge-based Leppo, Mayfield-based Preformed Line Products Company, North Canton-based Kenan Advantage Group, and Solon-Based HDT Global and MRI Software completed strategic acquisitions within the month. Meanwhile, The Riverside Company remained highly acquisitive during the month, acquiring Applied Educational Systems, BloodHub, FoodLogiQ, NEOS Overshoe, Newbridge Software, and OutSolve.


Deal of the Month

In October, Solon-based, MRI Software completed the international acquisitions of Springboard Research Ltd. and TPN Group, Ltd. These represented MRI Software’s 4th and 5th closed transactions in 2022. United Kingdom-based, Springboard is a provider of footfall counting and artificial intelligence-powered analytics to retailers, landlords and government bodies. The acquisition is expected to bolster MRI Software’s retail and smart data offerings, and provide its clients with deeper insights to guide their business decisions.

Johannesburg-based TPN is a registered credit bureau serving the residential, commercial and education markets in South Africa. Given the global economic uncertainty, the ability to leverage accurate, detailed tenant profiles is paramount to support decision making. TPN is recognized as the most comprehensive authority in its region and will enable MRI to provide its clients with deeper insights, centralizing typically disparate processes and enabling organizational compliance.


Evan Lyons is a Senior Associate with MelCap Partners, LLC, a middle-market investment banking advisory firm. For more information on MelCap Partners, please visit or email [email protected].