PE industry runs hot as pent-up demand is unleashed
Dechert LLP / Mergermarket Report finds record US$1.17tn worth of deals recorded during January - September 2021, eclipsing every prior full-year total back to 2015. In addition:
- 60% of North American and 49% of EMEA PE firms surveyed expect a significant increase in Limited Partner scrutiny of ESG issues and reporting over next three years.
- 54% of PE firms in EMEA surveyed expect one of the aftereffects of the pandemic to be trading successful portfolio companies to successor funds.
- 45% of PE firms surveyed have increased their use of private credit financing in buyouts over the last three years.
LONDON, Nov. 9, 2021 /PRNewswire/ -- Global law firm Dechert LLP has published its annual Global Private Equity Outlook Report in association with Mergermarket, a leading provider of M&A data and intelligence.
The Report, which examines how private equity (PE) firms continue to successfully navigate their way out of the pandemic, has found that the unprecedented deal activity is not letting up, with the industry set to far exceed past previous records.
Between January - September 2021, there was US$1.17tn worth of deals recorded, eclipsing every prior full-year total since 2015. Annual PE deal value is expected to more than double year-on-year heading into 2022.
The Report is comprised of 100 senior-level executives surveyed at PE firms in North America (45%), EMEA (35%), and Asia-Pacific (20%) second and third quarter of 2021.
Potential headwinds on the horizon
The Report cautions that the PE industry should not become complacent. Potential concerns, such as the spread of the Covid-19 Delta variant, supply chain disruptions, labor shortages and persistent inflationary trends, could disrupt the industry's growth trajectory. However, 41% of North American respondents expect market conditions for PE exits over the coming 12 months to be favourable.
ESG remains key
A consistent investment theme is ESG with 29% of respondents noting climate change as the most important ESG consideration when contemplating investing, with sustainability as the second most-selected consideration (14%). This is understandable given the run-up to COP26 and can be taken as the impact of the US market having caught up with Europe on ESG engagement. This development was reflected by 49% of EMEA respondents expecting a significant increase in Limited Partner (LP) scrutiny of ESG issues and reporting in deals over the next three years. Meanwhile, in APAC just 20% of respondents say the same.
Divergence emerges
Looking ahead, the Report recognises a divergence between large well-established players and smaller, mono-line or less well established market participants, making it harder for new entrants to establish themselves. The sheer size of transactions is also witnessing a revival of club deals in the US, with 53% of North American General Partners (GPs) anticipating the increasing prevalence of club deals in the pandemic's wake, compared to 37% in EMEA and 30% in APAC.
Interestingly, almost half (45%) of respondents surveyed say they have increased their use of private credit financing in buyouts over the last three years, a noticeable jump from Dechert's previous PE Report, when 35% of respondents reported the same.
Continuation funds on the rise
The Report also identifies the rising phenomenon of GPs selling assets to "continuation funds", which are also managed by themselves, allowing investors to maintain exposure to particular assets. This was especially evident in EMEA with more than half (54%) of respondents saying they expect one of the aftereffects of the pandemic to be trading successful portfolio companies to successor funds which typically happens through a GP-led secondary transaction.
Christopher Field, co-head of Dechert's global private equity practice based in the firm's London office, said: "GP-led secondaries have been a major feature of the European and US markets over the last 18 months since COVID-19. It's yet another example of PE coming up with creative solutions to the challenges it has faced and, in the process, increasing the volume of capital it is able to attract to invest in these sorts of deals. What is clear from the Report is that thinking creatively and using diversity of approach is paramount if firms are to stay ahead in the current market."
The Global Private Equity Outlook is published yearly by Dechert LLP and Mergermarket. Founded more than 35 years ago, Dechert's Global Private Equity practice advised on some of the first fund formations and buyout transactions.
About Dechert's Global Private Equity Practice
Dechert is a leading global law firm with 22 offices around the world. Our global team advises private equity, private credit and other alternative asset managers on flexible solutions at every phase of the investment life cycle. We form funds structured for market terms and tax efficiency; negotiate investments and advise on transactions and financings that maximize value; and structure and execute exits accomplished at the right time and delivering the best returns.
About Mergermarket
Mergermarket is a business development and market intelligence tool designed specifically for the M&A sector and provides proprietary intelligence and analysis on corporate strategy across the world. Visit www.mergermarket.com to learn more.
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