PE Pulse: Five takeaways from 3Q 2021

8 min approx | 4 November 2021

Pete Witte

Hi, everybody. My name is Pete Witte. I’m the Lead Analyst for Global Private Equity (PE) here at EY, and you’re listening to the PE post-miniseries on EY’s NextWave Private Equity podcast. Over the next seven or eight minutes or so, we’ll break down all the relevant market activity from the last few months, what kind of trends we’re seeing with deals and in the PE space more broadly, and what all of that means for you. Besides the podcast today, we’ve got a great written report, as well, that talks through some of these themes in more detail and to see that, you can just visit

We’re going to talk about a couple of things today. And the first is the deal market, and if you’re listening to this podcast, it’s quite likely that you are on the frontlines of this. You’re seeing these tremendous levels of activity, and so, we’ll try to give some perspective on that. And the other thing we’ll talk about is capital flows and what those look like both now and 5 or 10 years from now. So, let’s get into it. And what’s really setting the stage here is, obviously, the increased certainty and the increased mobility that we’ve seen since the release of the vaccine. Obviously, pandemic isn’t over yet; there’s still a lot of uncertainty out there, but the rebound in economic activity that we’ve seen is facilitating a much more attractive environment for M&A than we had certainly a year ago. We’re looking at global GDP estimates right now in the 5.5% range, which is clearly a very remarkable rebound. That’s giving us a very active M&A market. So, over the last nine months, we’ve seen about $4.2 trillion in global M&A activity, and that’s a record pace. So, all of those deals that got back burnered during the pandemic, they’re now coming to the forefront. We’re seeing strong activity in places like tech, which has obviously been a perennially active sector, but we’re also seeing some signs that sectors that have been a little bit slower to get back to making deals are starting to accelerate as well.

So, thinking primarily of the consumer here, where companies are reshaping their portfolios through M&A, but broadly, you know, private equity firms are playing a very active role in that. So far, this year, PE firms have announced acquisitions valued at about $870 billion, right? And that’s up 120% from the first nine months of last year. It’s up 110% from the first nine months of 2019, which was a “more normal” year, and it puts the industry well within striking distance for its first trillion-dollar year on record. And I think what’s happening is that during the financial crisis, a lot of firms pulled back when they should have been stepping on the gas, and with the pandemic, they decided they weren’t going to make that mistake again. And so private equity as a percentage of the overall M&A markets is now higher than it’s ever been. You look back to 2006, for example, right, private equity was about 24% of global M&A activity. In 2009, when firms really should have been investing, it was about 9%. Right now, it’s almost 30%, right? So, it’s making up a larger percentage of the market than it ever has before.

Now, where are those investments happening? You know, I think everybody who follows private equity is aware that investment in tech has been a hugely powerful theme for the last several years; interest there continues unabated. Over the last couple years in particular, tech has been about 30% of the total capital deployed. It’s been about one quarter of the total number of deals. You know, activity here really started with large-scale, transformational-type deals of legacy enterprise software providers, and those kinds of deals are still out there. But now we’re seeing a deeper focus on security, on automation, on work grow stage deals, and spaces like machine learning, AI, cyber, supply chain technology, digital payments, things like that, right? The other spaces where we’re seeing more activity, health care, probably no surprise, health tech in particular is interesting. Private equity firms are willing to come in at earlier stages than they have in the past. And on the consumer side, we’re seeing increases in both volume and values as private equity firms start to refocus some of their efforts there.

But all of this deal activity is having knock-on impacts in other parts of the market, so with fundraising, for example, we didn’t see a pickup in the second quarter of last year like we did with deals, and even this year started off pretty slow as well. And I think what happened was that fundraising just sort of got back burnered during the pandemic, right? It was all hands-on deck, putting out fires in the portfolio, doing everything virtually, made things really difficult. So, it was tough, right? And just not necessarily an area of focus, but that’s changed, and fundraising is now very strong again. Private equity firms have closed on commitments valued at about $400 billion so far this year; that’s up 27% from same period last year, some 19% from the same period a couple of years ago. We’re seeing a number of large flagship funds close, a lot of them in the $10+ billion range. And I think what’s interesting is that, even at that kind of a scale, all these funds are closing very, very quickly, they’re closing up larger sizes than their predecessor funds, and in some cases, they are significantly oversubscribed. So, the demand has definitely returned, and LPs are continuing to feed the machine more than ever.

And so, the cumulative effect of all this, though, is that private equity as an asset class continues to grow, right? According to PitchBook data, it’s about $3.6 trillion in AUM right now. That’s about twice what it had 10 years ago: about $1.3 trillion of that is dry powder, the rest is tied up in the portcos. And I think what’s interesting, though, is that to some degree future growth isn’t going to come from the same place as it always has. You know, you think about the institutional market, for example, right, and the degree to which private equities penetrated there. In the US, for example, 90% of all the public pension funds out there now include private equity in their portfolios, and those investors have increased their allocations over time, and it’s likely that they’ll continue to do that. But I think what’s exciting are some of these new sources of capital, right? So, in particular, you look at the retail space and you look at the insurance space. On the retail side, we’ve seen some movement by regulators to allow access for more investors; so last month, for example, there was an SEC advisory group that voted unanimously to recommend increasing retail investors’ access to the private capital vehicles. And while that recommendation is nonbinding, it is representative of a broader push to allow for more of that type of access. Clearly, there are certainly those that disagree with that. The issue is far from settled, but you do hear a little bit here and there about products that are being developed to take advantage of that market opportunity. And I think the pandemics would have pushed the deployment of some of those back a little bit, but we will start to see some experimentation with these over the next few years. And that’s going to represent a tailwind for fundraising.

The other place we’re seeing money come from is insurance, right? We’ve seen a lot of deals there recently, all with the intent of increasing a firm’s permanent capital base, right? Firms are adding $30 billion, $50 billion, in some cases almost $100 billion in permanent capital with these types of deals. So, these two channels, retail and insurance combined, they represent about $110, $120 trillion in assets. So, I was listening to the earnings call from one of the large public managers the other day, where they pointed out these two channels, retail and insurance combined, they represent about $110, $120 trillion in assets, right. That’s basically double the size of the spaces where private equity firms have historically focused, the pension, the endowments, the foundations and so on; and so, unlocking this, we’re really in the early innings of that, but these are going to be important parts of the market going forward.

But overall, I think right now, it’s a picture of strong activity on basically all fronts, and then beyond that, right, it’s one that’s continuing to evolve in terms of how value is created, but also in terms of a changing customer base. So that’s it for today. I do want to thank everybody for listening; the feedback that we’ve gotten from the series has been tremendous. If there are topics that you would like us to cover, don’t be shy; reach out and let us know. And in the meantime, don’t forget to subscribe and we’ll be back next quarter with another update.

Until then, take care, everybody.