Private Equity Fundraising Crushing M&A Deal Records

The industry of private equity is on a record-breaking spending splurge this year.

Private equity deals had hovered around 20% of all transactions since 2017 and were even lower before that due in part to the financial crisis of 2008. The pandemic brought with it concerns about how the markets would fair this year, but it would seem the concerns were unnecessary for the private equity sector. This year alone, mergers and acquisitions accounted for an unprecedented 30% of global transactions. Big names including Apollo Global Management Inc., KKR & Co., and Blackstone Group Inc. have pushed fundraising and PE deal flow nearly to all-time highs.

In the United States, a private equity syndicate announced recently that it would be taking part in one of the largest buyouts of all time. This indicates that investors are currently flush with money and looking to put the cash to work for themselves. On the other side of the pond in the United Kingdom, PE funds haven’t been this busy since the financial crisis. Some well-known names have been targeted, including the grocery chain Wm Morrison Supermarkets Plc. The PE sector has accumulated a total of $3.3 trillion in unspent capital, which is a record to date. These funds included $1 trillion held by merger funds, a substantial resource for fresh acquisitions.

Substantial amounts of funding and investment opportunities have created a boom in private equity. As PE firms take over more companies, the more those firms grow. That leads to more cash that can be extracted from their investments and then to more opportunities that can be taken. However, the industry’s success has been drawing greater scrutiny from authorities worldwide. The risk of this is that it may limit returns in the future.

Track Record of Private Equity Fundraising

Since 2011, PE deal flow in the industry has almost tripled. When the pandemic hit, there were concerns abound, but the market showed surprising strength thanks in part to massive government stimulus that kept markets and economies afloat around the world. Even still, the pace of recovery was remarkable. In the first half of the year, private equity fundraising generated $539 billion globally, which is almost equal to the total yearly average of $544 billion since 2016. When one combines fundraising, equity deal value, and exit value, the sector is currently on track to top $1 trillion by the end of this year. That would dwarf the previous record set in 2006 of $804 from the industry peak right before the global financial crisis.

It appears that it’s not the deal count, but the deal size that is behind this increase in value. The number of individual deals was tracking up slightly at 16% compared to the first half of 2020, but it was still coming in a few hundred deals under the average of 4,000 annual deals that the market typically sees. At the same time, the average deal size spiked from $718 million to $1.1 billion, a difference of 48%. This shows that the market’s value is caused by fewer, but bigger deals.

Critics of these types of mergers and acquisitions claim that managers extract as much cash as possible from vulnerable and highly leveraged companies, ultimately harming them. However, proponents of these M&A deals like to point out the industry’s track record of outpacing equities while expanding businesses.

So far, the money flow doesn’t look like it will be slowing down any time soon. Private equity is trying to tap into the $74 trillion savings pool owned by household investors by rolling out products geared specifically for them.

Tech and Healthcare Industries Attract Investors

So far this year, one in every three M&A deals has had to do with a tech company – usually in software. Tech has been one of the most resilient divisions this year. This is mostly driven by more people working remotely during the pandemic and increases in digital development. PE firms have been fundraising using pitchbooks to take advantage of this hot sector. Tech investors see the cloud-based software market as a great opportunity since it’s already large and continues to grow fast. In June, Luminate Capital Partners announced that it had closed its third fund at an oversubscribed $1 billion, which significantly exceeded its target of $700 million. They also backed Axonify – a frontline employee training software provider – back in April. The bias in these sectors is likely to continue in the years ahead because development in the tech industry means growth, and growth means more opportunity.

That’s not to say other subsectors haven’t shown appeal to investors. We have seen that PE investors have been drawn to fintech and healthcare IT as well, with Frazier Healthcare Partners being among those with oversubscribed funds. In May, Frazier closed its tenth healthcare-focused fund at $1.4 billion. In December, they also acquired a 50% stake in CSafe Global. This Ohio-based company is a supplier of air cargo services and cold chain shipping to the pharmaceutical and life industries. The fact that Healthcare M&A deals continue to be so robust is unsurprising given the healthcare crisis caused by Covid-19.

SPACs Will Have an Impact Despite Slowing Down Midway Through Year

An increase in regulatory inquiry led The US market’s fondness for SPAC-sponsored initial public offerings to come to a slowdown this spring. But despite the lower volume of special-purpose acquisition companies that is likely to continue throughout the year, the $207 billion in SPAC-IPO capital that was raised since January of 2019 will leave its mark on the private equity fundraising environment.

SPACs have spent over $49 billion to close M&A deals, while another $48 billion has been committed to mergers that have been announced. This means that over 400 SPACs, which hold $133 billion, are looking for companies to take public. This creates some challenges, one of them being that some portion of that unspent capital will add to the intense competition that comes from firms hunting through a scarce supply of valuable acquisition targets. However, opportunities will come from this situation as well. SPAC mergers will continue to create a strong channel for general partners wanting to get a fast entry into the public markets.

SPACs have proven themselves to be eager buyers of portfolio companies that present quality pitch books. This increased buying helped boost the 2021 exit market. SPAC mergers made up almost a quarter of North American exit value. Thanks to $84 billion generated by PE deal flow, exit value backed by global buyout soared to $488 billion this summer. That’s 10% higher than the full-year total for 2020. Traditional IPOs also did exceptionally well, accounting for $90 billion in exits.

The surge in public exits in North American was largely thanks to remarkably robust US public markets. If this pace doesn’t slow through the rest of the year, we can expect a global exit value near $1 trillion, a doubling of the previous record of $521 Billion in 2014.

New Records Drive a Demand for Secondaries and Collaboration Among PE Funds

Tech and Healthcare aren’t the only markets attracting investors. Some of the biggest names in M&A deals are moving into real estate, infrastructure, and credit, leading to new fundraising records. KKR, a New York-based company, raised $59 billion across its various private market strategies in the second quarter.

This groundbreaking fundraising has been driving investors toward wanting to buy secondaries – vehicles that buy existing portfolios of private equity holdings from investors who want to exit before the funds mature. Secondaries are also a useful tool when it comes to stepping in to buy out investors when fund managers want to keep an asset beyond the fund’s life. The latest deal like this was in September when CVC Capital Partners agreed to acquire Glendower Capital, an $8 billion secondary buyout specialist. The different investment strategies being driven throughout the industry have pushed overall assets held by major managers to levels beyond most leading mutual fund houses.

The bigger funds that private equity has been accumulating have opened doors to transactions that were only available to big businesses or sovereign wealth funds. By collaborating, several PE funds and investors can pool resources to set their sites on ever more ambitious targets. In June, Carlyle Group Inc., Blackstone, Hellman & Friedman, and Singapore’s GIC Pte announced a majority stake in Medline Industries Inc. The deal was worth more than $30 billion.

The abundance of private credit funds that have stepped in since the financial crisis to replace banks in riskier lending areas has also aided the rise of these large deals.

Private Equity’s Appeal to the Global Market

Being able to return capital to investors at the rapid pace that PE funds have been in 2021 draws a great appeal for investors to push for acquiring private equity as an asset. Thanks in part to this, limited partners have shown great interest in keeping the momentum in this market going. Over 90% of limited partners are planning on investing at least an equal amount of capital in private equity in the upcoming year, which echoes the outpouring of investments they made in the first half of 2021.

Among the biggest PE increases in funds over 2020 were venture, merger, and growth funds, and the bias toward larger size was evident. Through the end of June, just nine mega-funds – those with over $5 billion in assets – collected $120.4 billion. That’s over half of the total private equity capital raised. Most of the mega-funds were big names, like Kohlberg Kravis Roberts, EQT, and CD&R. On average, these mega-funds raised 17% more than they had targeted for the year.

Private equity deals have found their appeal outside of North America as well, specifically in the UK. Thanks in part to cheap valuation, a hands-off approach from the government, and a lenient takeover code, the UK is on track to have its busiest year yet with mergers and acquisitions since the financial crisis. Currently, there is a bid by Cobham Ltd. to buy its rival Ultra Electronics Holdings Plc – a bid that has caused UK authorities to initiate a probe based on national security grounds. Meanwhile, Fortress Investment Group, Clayton Dubilier & Rice LLC, and others are trying to buy Morrison, the fourth-largest supermarket chain in the UK.

Private Equity Going Forward

It can be hard to predict if the rest of 2021 will reflect the record-breaking first half. However, even with the unprecedented vigorous activity since the beginning of the year, there is continued evidence of ongoing demand for private equity deals.

Private equity deal-making increased in the first half of the year, putting the market on track to deliver about 3,700 deals by the end of the year. However, that number is still below the approximately 4,000 that the industry typically sees each year. General partners have struggled to close smaller deals since the pandemic hit. This may be due to uncertainty in the market, or because infrastructure has been overwhelmed by the sheer volume of larger transactions. Regardless of the reason, the numbers indicate that many general partners are still in the market waiting to close transactions or looking for new targets. Because of this, we will likely continue to see a surge in demand for new deals for the rest of 2021.

While there seems to be little to stop the influx of money into the private equity sector right now, the rapid growth of PE deal flow has been drawing an increased amount of attention from politicians and those who seek to regulate the market. In the US, senior members of the Democratic party are currently debating measures that would make adding leverage on deals more difficult. In the UK, a tabloid’s continuing campaign against PE deals exemplifies how the industry that once was relatively obscure is now attracting more hostile media attention. Meanwhile, China has announced plans to crack down on private equity funds that raise money directly from domestic retail investors. Given China’s traditionally large role in the global market, this move may put a significant dent in fundraising numbers globally.

Overall, it seems likely that the next six to twelve months will be similar to the first half of 2021. The forces that drove the exceptional activity of the first half of the year – the large pile of cash and the strong economy – don’t show any signs of slowing down for the US and UK markets. Assuming that the private equity industry continues on its current path, it will easily be set to surpass a record-breaking $1 trillion by the end of this year. It can be hard to predict how the market will behave going forward, but the tech and healthcare industries have had a huge boost in M&A deals this year so far. Given that the pandemic is still in full swing, this pattern is likely to continue throughout the rest of 2021 as tech and healthcare maintain their importance. There is a possible threat of new policy being made in the US to impede the market, but given the continued appeal of the private equity sector to investors, the momentum is likely to carry over into the rest of the year unless new inhibitory regulations are passed.

About the author

Leslie Morales is the CEO of Launch Module and a Certified High Performance Coach. Learn more about Leslie and her team on our About Us page.