This private equity sector had a great 2021 – but don’t expect record activity this year

US mid-market private equity firms have had a year of strong trading and exit activity in 2021. The road ahead, however, may not be so smooth.

Last year, mid-market private equity firms completed 4,121 deals, representing a combined total of $602.6 billion – an all-time high for the industry, according to PitchBook’s annual mid-market report. private equity, released Monday. The previous record high for deal activity in midstream private equity markets was reached in 2019, when the total number of deals reached 2,775 for a combined total value of $400.4 billion.

PitchBook defines a mid-market deal as one in which a US-based company is acquired through a buyout transaction valued between $25 million and $1 billion, with a fund size of 100 million to $5 billion. This does not include growth capital transactions.

PitchBook analysts and report authors Wylie Fernyhough, Rebecca Springer and Jinny Choi attribute much of last year’s record trading activity to the broad economic recovery from the Covid-19 pandemic. “2021 was certainly the most active trading period in the history of the US private equity middle market,” Choi said. Institutional investor. “There are several factors that led to this: [There] was plenty of dry powder thanks to years of healthy fundraising, [and] Private equity firms were also able to get easy funding thanks to the low interest rate environment we experienced post-pandemic. »

In fact, mid-market PE dry powder in the United States reached a record $449 billion in 2021, according to the report. Choi said the pandemic recovery has also encouraged strong competition for assets, which has helped boost valuations and boost cumulative deal value for 2021.

Tax policy also played a role in last year’s private equity mid-market deal activity. According to the report, the election of President Biden in 2020 and talk of an anticipated capital gains tax hike have raised concerns about lower yields in 2022 and caused a “rush to end the year”. the year” to conclude agreements. In November, however, the Build Back Better plan was passed and did not include a capital gains tax hike, which reduced the urgency of closing deals and generally slowed transactions.

PitchBook analysts expect deal activity to slow in the first half of 2022 “as companies and banks work through the deal pipelines they had lined up in an effort to evade higher taxes. high,” the authors wrote. “We can see the negotiation slow down just because people don’t have [a] reason to rush to make deals,” Choi added.

U.S. mid-market private equity firms also saw record exit activity in 2021, with 1,091 exits for a total exit value of $241.7 billion. PitchBook analysts attribute a number of factors, including a spillover of delayed releases from 2020, rising multiples following the post-pandemic economic recovery, which pushed portfolio companies to hit price targets sooner and exit their holdings sooner than expected, and an influx of cash and dry powder on corporate balance sheets that pushed them to buy more private equity-backed companies.

In 2022, inflation fears and potentially rising interest rates could lead to lower corporate margins and pressure on corporate multiples, which could lead to slower exit activity. PitchBook analysts also believe that the Russian-Ukrainian conflict could produce economic uncertainty this year, leading to more subdued exit activity compared to last year.

“This has happened before in public markets, with many high-growth companies seeing their sale price halved or more in a short period of time,” the analysts wrote. “Volatility effectively knocks public quotes off the table, although they are much less critical for the mid-market exit environment than for the high end of the market.”

Mid-market private equity fundraising remained flat in 2021. Although it did not match or surpass its 2019 record of 182 funds with a total of $154.8 billion in capital raised, it ended the year at 140 funds and $111.7 billion. Last year’s numbers were also lower than 2020’s fundraising numbers, which analysts say is a sign of a relatively slower recovery in fundraising in the middle market than others. areas of private equity fundraising.

“We are seeing a shift from private equity to larger funds in general,” Choi said. “Investors are increasingly looking to allocate more capital to private equity and are looking for larger funds that can absorb that capital. They are also looking to simplify their relationship with managers, leading them to invest in larger companies that have multiple strategies than investors. [might] being interested in.”

In fact, data from PitchBook in the third quarter of 2021 showed that large companies with at least one mega-fund have launched an average of 2.5 new mid-market buyout strategies every year since 2011.

After an incredible year in the U.S. private equity middle market, Choi said companies should prepare for a lot of uncertainty in 2022. fallout from Russia’s invasion of Ukraine,” Choi said.

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