3 minute read 21 Apr 2021
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PE Pulse: Five takeaways from 1Q 2021

Deal volume, tech deals, SPACs, hold periods and valuations are top of mind for PE investors right now.

In brief
  • As pandemic uncertainty begins to recede, PE boasts a blockbuster Q1.
  • The value of global deals hit US$261b in the first quarter.

The first quarter of 2021 was a blockbuster quarter for PE deals. Despite the challenges presented by the COVID-19 pandemic, strong numbers indicate the ability of PE firms to seamlessly deploy capital in the “new normal.” Our latest research dives into the topics that are top of mind for PE executives right now.

1. PE deal activity in Q1 was the highest of any quarter in the past decade.

After 2020 saw limited activity in the first half followed by a strong resurgence in the second half, private equity (PE) entered 2021 on a strong wave of activity. Announced deals were valued at US$261b in 1Q21, the highest since 2Q07, and more than double 1Q20.

The Asia-Pacific (APAC) region continued to outperform in the first quarter: deal value increased 172% while the number of deals was effectively flat. The Americas also witnessed strong growth, with deal value increasing by 137% versus 1Q of last year. EMEA also witnessed a 65% increase in deal value during 1Q21 as the number of deals grew by 14%.

2. Technology gained maximum traction during the COVID-19 pandemic.

Tech deals accounted for 26% of global activity and 34% of US activity in the last 12 months.

Unsurprisingly, tech-enabled businesses remain a powerful thesis. Overall, tech investments have accounted for nearly a quarter of PE activity by value over the last 12 months. In the US, where many of the largest tech deals are centered, the sector has accounted for 34% of PE deals by value.

Financials have also witnessed traction as investment in life insurance providers over the last 12 months grew more than eightfold versus a year ago. Health care, traditionally a haven during economic slowdowns, witnessed strong growth as well as PE firms looked for bargains amid the pandemic fallout.

3. The SPAC market expanded at an unprecedented rate during the COVID-19 pandemic.

The growth of special purpose acquisition companies (SPACs) was one of the key storylines in the capital markets last year and has opened a viable alternative path to the public markets for private companies. In 1Q21, SPACs raised US$97b in IPO proceeds across nearly 300 IPOs, already exceeding the amount raised during the entire year in 2020.

Many PE firms have histories with SPACs that predate the current boom, while others have only recently launched inaugural vehicles. Overall, SPACs backed by PE firms have raised US$25b over the last 12 months. Most PE-backed SPACs are focused on investing across technology, consumer products, retail, power and utilities, and health care.

Perhaps the most significant implication is their ability to offer an exit for PE firms seeking to sell portfolio companies. For PE sellers, taking a portfolio company public by merging it with a SPAC can be a faster, cheaper process compared with a traditional IPO, and can allow the sponsor to preserve upside by retaining shares in the public company. In the first quarter of 2021, SPACs represented buyers for 19% of PE exit deals by value.

4. Holding periods could increase as a result of the pandemic, although IPO exits rebounded strongly in 1Q.

Exit activity saw a steep decline in 2020: a result of pandemic-induced shutdowns in the capital markets and overall uncertainty around the outlook for businesses. This effect echoes what was experienced during the 2008 global financial crisis, when exit timelines were pushed back by one to two years. According to a survey by Investec, over 80% of PE firms said they would retain their holdings for another year rather than sell in the current market. Subsequently, many general partners worked with their limited partners to extend funds’ lives, avoiding liquidation of an investment in a down market.

With a broad-based recovery in public markets, an influx of capital from retail investors and the continued low interest rate environment, PE-backed IPO exit activity saw a strong rebound in 1Q21. PE-backed IPOs were valued at US$26.1b in 1Q21, an increase of nearly 245% compared with the same period a year ago. The technology sector dominated IPO exits, accounting for 40% of total proceeds.

5. Finding the right target at the right price remains a challenge in an uncertain market.

One of the more interesting outcomes of the pandemic is that despite unprecedented levels of dislocation, valuations remained high for most deals. Indeed, 2020 saw LBO valuations exceed 11x earnings before interest, taxes, depreciation and amortization last year, according to S&P LCD, and Pitchbook expects that about one fifth of deals this year will have multiples in excess of 20x earnings. While part of that is attributable to the types of assets that PE firms are now focusing on – tech in particular – there is a concurrent theme of the pandemic driving premium pricing for high-quality assets that were resilient to market uncertainties. With roughly US$700b-US$800b in SPAC mergers expected over the next two years, there seem to be few headwinds that might moderate elevated pricing.

Summary

As uncertainty from the COVID-19 pandemic begins to recede, private equity activity has never looked more robust.

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