Wall Street titans like David Rubenstein were made rich and famous on the belief that the right private equity firms benefit all in society by helping make companies more efficient, enabling them to act as economic engines that provide jobs and create wealth. While the 1980s have long been thought of as the heyday for deal-making, the “Barbarians at the Gate” can step aside. 2021 is shaping up to be a banner year for private equity deals in both pace and volume, as firms find new ways to buy good companies struggling under the weight of the COVID-19 pandemic, among other problems. And some ambitious firms have been wildly successful in raising funds.
“It’s continuing to accelerate,” says Steve Remelius, managing director and head of Structured Finance. Investors are clamoring to put up capital for deals across the spectrum of high and low valuations, all with the hope of high-yielding returns. “Sponsors with an industry-thesis-first approach or sector specialization continue to grow. And with that often comes a broader willingness to roll up their sleeves for opportunistic investments and pay higher valuations for top-quality and well-run businesses.”
Middle-market private equity deals are expected to easily reach record levels in 2021 as target merger and acquisition (M and A) activity in the US so far this year surged 139% to $2 trillion, according to Refinitiv. That pace of deal-making comes even before the traditional fourth-quarter rush on deals that could be more feverish, given the market perception of a potential tax increase on capital gains.
“We are seeing sponsors get very anxious to invest,” added Allison Reinke, managing director of Sponsor Coverage. “Some are feeling pressure from their limited partners to deploy the record amount of capital raised, and others are responding to strong investor sentiment and plentiful access to debt financing. On top of that, you have a backlog of deals that were impacted by COVID-19, leading to higher volume in the market.” With so many deals out there, those of higher quality are able to command “very high premium valuations and debt multiples right now,” said Reinke.
Last year, firms were mostly focused on figuring out how to support the companies currently in their portfolios as the pandemic raged on, according to Andy Kahlenberg, managing director and head of Sponsor Finance. But this year, those same firms adjusted to fundraising in a virtual world. “We expect strong fundraising to continue well into 2022,” Kahlenberg said.
