the private equity market is booming
As a result of the release of pent-up demand, the private equity market is booming.
In collaboration with Merger market, a leading source of M&A data and analysis, global law firm Dechert has released its annual Global Private Equity Outlook study.
The benchmark research, which looks at how private equity (PE) firms are navigating their way out of the pandemic, showed that the unparalleled transaction activity in the sector is showing no signs of slowing down, with the industry on track to break all prior records.
Between January and September 2021, USD1.17 trillion in transactions were recorded, shattering every previous full-year total dating back to 2015. In other words, as the industry enters into 2022, the annual PE transaction value is on track to more than quadruple year over year, with money still flooding in. In 2020, global PE and venture capital dry powder will reach a new high of roughly USD2 trillion.
"Record deal volumes, historically low interest rates, and massive amounts of dry powder are a recipe for explosive alternative asset industry growth, which is expected to last for several years, and Dechert is well-positioned to take advantage of these extraordinary growth opportunities with our complementary practices," says Dechert.
TMT and pharma/medical/biotech, as well as financial services, are among the sectors in which Dechert's PE team has been particularly active in deal making," says Dr Markus P Bolsinger, co-head of Dechert's global private equity group and partner in the firm's New York and Munich offices.
The findings are based on a global study conducted by Mergermarket on behalf of Dechert in the second and third quarters of 2021, which included 100 senior-level executives from private equity (PE) companies in North America (45%), EMEA (35%), and Asia-Pacific (20%).
The research also makes the point that the PE business should not become comfortable, noting that the previous deal record of USD821 billion was established in 2007, just before the financial crisis halted the credit boom of the time.
The spread of the Covid-19 Delta variant, Covid-19-induced supply chain disruptions, labor shortages, and ongoing inflationary tendencies are all potential future challenges that could derail the industry's growth trajectory. Despite these worries, 41% of North American respondents believe that market circumstances for PE exits will be very favorable in the next 12 months.
Climate change is the most important ESG concern taken into account when considering investing, according to 29% of respondents, with sustainability being the second most preferred consideration (14 per cent).
Given the proximity to COP26, this is understandable and can be interpreted as the result of the US market catching up to Europe in terms of ESG participation. 60% of North American respondents and 49% of EMEA respondents predict a considerable increase in Limited Partner (LP) scrutiny of ESG problems and reporting in agreements over the next three years, reflecting this trend. In APAC, on the other hand, only 20% of respondents agree.
"One of the main attractions for the APAC region used to be its low-cost manufacturing base and less stringent environmental rules," says Siew Kam Boon, a private equity Partner in Dechert's Singapore office.
With the rising attention on ESG and sustainability (including modern slavery regulations), private equity firms may explore investing in targets that are less influenced by these and other ESG issues.
Instead, we anticipate to see substantially more private equity investment in renewable energy, high-quality natural capital, and firms that employ technology to cut carbon emissions in the region because of APAC's tremendous potential for internationally important climatic and ecological impact," says Boon.
Looking ahead, the report sees a growing divide within the industry between large, well-established players, such as multi-strategy asset managers, and smaller, mono-line or less well-established market participants, making it more difficult for newcomers to break into the market.
With 53% of North American General Partners (GPs) forecasting an increase in the predominance of club deals in the wake of the pandemic, compared to 37% in EMEA and 30% in APAC, the sheer magnitude of transactions is also seeing a comeback of club deals in the US, the birthplace of the PE megadeal.
Surprisingly, nearly half of the respondents (45%) claim they have increased their usage of private credit financing in buyouts in the last three years, a significant rise from Dechert's previous annual global PE research, when just 35% said the same.
The research also highlights the growing trend of GPs selling assets to "continuation funds," which are managed by themselves and allow investors to keep their exposure to certain assets. This was notably obvious in EMEA, where more than half (54%) of respondents predicted that one of the pandemic's aftereffects would be moving successful portfolio firms to successor funds, which is normally done through a GP-led secondary deal.
"GP-led secondaries have been a prominent part of the European and US markets over the last 18 months since COVID-19," said Christopher Field, co-head of Dechert's global private equity practice based in the firm's London office.
It's simply another example of private equity coming up with innovative solutions to problems and, in the process, boosting the amount of funds available to invest in these types of ventures.
The analysis makes it obvious that thinking creatively and adopting a variety of approaches are critical if businesses are to stay competitive in today's market."