As we turn the corner into the final months of the year, we are taking account of this unpredictable year thus far—and outlining our projections of what may come to pass in the days ahead.

Top 3 Debunked Myths from 2020

When COVID-19 hit, the industry expected pervasive negative implications on deal-making and company health. These expectations, outlined and debunked below, turned out to be myths—not reality. In short: this year will close out far stronger than anticipated.

 1 

When we entered this period of economic uncertainty, the investment banking industry expected to see an increased demand for stressed or distressed activity and “healthy” or growth M&A to grind to a halt. We were wrong.
While M&A slowed industry-wide in the early months of the crisis, Lincoln has now seen material pickup. In fact, we have launched as many deals in the 3rd quarter this year amid a global pandemic as we did during a bull market last year. New business activity, a leading indicator for our business, is up 70% over the prior three months.

Looking back at the start of 2020, the private equity community’s number one goal was to put more capital to work. With that in mind, PE firms have been hungry to invest in those businesses that have done well despite the hurdles during COVID-19—and now have compelling stories to tell about their performance during this period and/or outlook going forward. At the end of the day, the supply of capital available for new investments continues to greatly exceed the opportunities to invest in high quality companies.

 2 

The stock market has held up better throughout COVID-19 than anyone anticipated.
At times, the stock market has seemed to be divorced from the events of the year. At others, the mercurial market has been easily swayed by news triggers. Stock market prices indicate that investors expect a strong recovery next year—perhaps investors anticipate approval of vaccine and therapeutic options and/or continued federal stimulus to sustain both businesses and consumer spending.

 3 

As in any down market, the industry expected many businesses to face challenges and require restructurings or distressed sales. Yet, the lenders to these businesses have been slow to force this activity despite increases in default rates. In addition, by propping up struggling businesses, in some cases federal stimulus may have masked the true economic damage that COVID-19 has caused.
What we know for sure is that both lender patience and government stimulus will not last forever. The day of reckoning for many companies in stressed and distressed sectors of the economy will come soon.

Lincoln Perspective: Predictions for Q4 and Beyond

It is a hazardous game to place bets on what may happen in the remainder of this unpredictable year and beyond. But with the benefit of insight gained from the first half of the pandemic, we expect:

If both the White House and Congress turn blue on November 3rd, investors could see a material increase in capital gains tax rates. With this in mind, in the near term we expect business owners who were contemplating a sale to do everything within their power close a deal sooner rather later. While tax increases passed in Congress traditionally have taken affect in the following tax year, Congress has the right to make them retroactive to the beginning of the year.

Normally, a strong restructuring year is poor year for M&A and a strong M&A year is a poor year for restructuring. Yet, looking ahead, we expect both to do well. With capital to deploy, investors will continue to look for compelling businesses that have remained healthy during the pandemic or bounced back quickly with strong outlooks. At the same time, as economic stimulus dissipates and the fog clears, we’ll also see that there is distress hiding in plain sight—revealing targets for opportunistic investors.

For M&A deals in 2021 we expect: