2021 is shaping up to be a banner year for private equity deals.
Steve Remelius, Andy Kahlenberg and Allison Reinke
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.
Key points for sponsors with underlying investments considering future fundraising
An increase in participants in the market amid the storm of activity over the last year meant that sponsors had more choices of lenders. “In the past, there was more focus placed on highest leverage and cheapest price,” according to Reinke. But during the pandemic, CIBC sponsor clients worked with a relationship-focused bank. “We’re willing to work with borrowers if there’s a troubled situation. We’ll do some creative things to help support them in uncertain times,” Reinke said.
Furthermore, Kahlenberg has the following advice for clients: “Don’t shop for price. Shop for the value of the holistic relationship.” CIBC provides unique alternatives to the basic fund finance solutions and can blend those with a broader value proposition to the underlying portfolio companies for a relationship view.
Because there’s a lot of capital floating in the market, and so many new entrants, Remelius recommended that middle-market sponsor clients make sure that the lender they choose can provide consistent delivery of financing and bring idea generation to the relationship, rather than just capital.
CIBC, specializing in middle-market companies, offers services to financial sponsors, including management fee lines of credit, capital call lines of credit and partner loans. These are in addition to M and A financing and other solutions aimed at supporting our clients’ portfolio investments. CIBC seeks to offer guidance throughout a sponsor’s investment horizon and that may begin with our event-based financing solutions, including senior secured term loans and revolvers, senior stretch, subordinated debt and unitranche solutions, via first out.
“We financed several new and existing borrowers during a disruptive 2020, and continue to be very active in 2021 because of the consistency in our approach to deploying capital,” Reinke added. With the success of this approach and robust pipeline, the CIBC Sponsor Coverage Group expects loan commitment growth across fund finance and portfolio companies to reach double digits in the coming quarters.
Private equity fundraising and deal activity continues to accelerate, with 2021 expected to be a record year for both. Even our sponsor clients face fierce competition for investments. CIBC can offer a multitude of services to sponsors and their portfolio companies with an approach that leads to creative solutions for addressing their unique circumstances and ultimately helping them achieve those high-yielding returns.