Private Equity
Market Snapshot

Outlook for 2021

Private equity activity is on a path that could see the industry achieve new highs in 2021. As of mid-June, global buyouts totalled more than $350 billion¹, according to Preqin data, exceeded only by the first half of 2007 (prior to sharp declines later that year as credit conditions tightened). Some segments and regions have already hit new records. Crunchbase analysis shows that European venture capital investment achieved a new high of $21.4 billion in the first quarter², while the UK buyout deal count hit a record 132 transactions worth an aggregate £20.5 billion over the same period, according to Mergermarket³.

Huge global stimulus, cheap debt and growing optimism about the recovery from COVID-19 have fuelled the rebound. As we enter the second half, it is worth examining the themes that shaped the first half of 2021 and asking what the next six months might hold.

First Half in Review

Auctions Heat Up with Seller-Friendly Terms

Auctions have dominated the deal landscape, and terms have tipped ever further in favour of sellers, especially for the most attractive assets. Terms that might have been unlikely a few years ago are entering into seller auction drafts, and some of these first drafts are being executed with little substantive amendment. Seller-friendly conditions featuring in many auction processes include:

While there have been successful attempts by sponsors to pre-empt auctions – such as EQT’s €4.5 billion deal for French laboratory services group Cerba before the sale process started in earnest – sellers have tended to favour the competitive tension that comes with auctions.

Valuations Hit New Highs in Europe

Competitive processes have been driving asset prices. Four consecutive quarters of growth drove European private equity acquisition multiples to 11.5x trailing EBITDA in the first three months of 2021, according to Clearwater International data.

While valuations are higher across the board, there are clear hotspots. Multiples for businesses in the UK and Ireland increased by over two turns of EBITDA to 12.9x (average across all sectors), while healthcare assets across Europe reached 13.7x in the first quarter.

Recovery Expectations Drive Increased Activity

Expectations of a return to normality and opportunities to position for the recovery have been driving deals. Other themes have included:

Increased appetite for European investment from Asia-based funds – for example, Hillhouse Capital’s €3.7 billion purchase of Philips’ appliances division.
An uptick in buy-and-build deals – for example an 85% increase in UK bolt-on deals by private equity portfolio companies in the first quarter, according to Rickitt Mitchell’s Buy and Build Barometer⁴.
Infrastructure deals that offer returns from growth prospects as well as long-term income – such as the £3.5 billion Blackstone, Global Infrastructure Partners and Cascade Investment deal to take the aviation services group Signature Aviation private.

Second Half Outlook

Demand for Assets Tempered by Focus on Valuations

The desire to deploy capital and lender appetite to supply debt on attractive terms is likely to persist in the second half. However, there are some factors that could impact the rate of deal making in the later stages of the year. Valuations are likely to play the biggest role, with signs already emerging that growing numbers of sponsors are becoming less comfortable with seller expectations in heated auctions. Further success in beating COVID-19 and the related impact on economic recovery will also play a role. As a result, investment activity may slow to more normal levels as buyers readjust offers.

Conditions Favourable for Megadeals

Blackstone, Carlyle Group and Hellman & Friedman’s $34 billion deal for US medical supplier Medline has highlighted the potential return of megadeals. EQT and Stonepeak’s offer to buy Dutch Telecoms group KPN for some €18 billion illustrated similar ambition in Europe, although the approach was ultimately rejected by the company’s board. There are relatively fewer potential targets of such scale in Europe than in the US, but the issues raised are largely the same. These include:

Longer Hold Periods for Best Investments

The model of holding investments for four to six years is showing increasing variation, with funds adopting new structures to maximise flexibility. In June, EQT launched a new longer-term hold strategy – acquiring pest control business Anticimex at a valuation of about £5.1 billion from a mature EQT fund that had already owned the business for nine years⁵.

Many investors wanting stable long-term investments with attractive returns will be ready to back such a strategy. There are several advantages, including avoiding the forced disposal of good assets to enable a “timely” return, and an ability to re-calibrate carried interest terms. However, sponsors who engage in such “self-dealing” must demonstrate that they can operate transparently on both sides of the transactions at fair valuations, and will typically need to ensure that existing limited partners are offered the opportunity to participate in the purchase as well as the sale.

Secondaries Draws More Players as Investment Rises

The private equity secondaries space continues to mature and expand. Blackstone’s global head of its Strategic Partners division expects the market to exceed $100 billion in 2021⁶, a new milestone for the segment.

More firms are making high-profile entrances to the space, including TPG and Apollo, while KKR⁷ is reported to be considering a secondaries strategy. The lengthening lifespan of investments and funds is one driver for the sector, while investor demand for a wider range of alternative investments is another. As new firms enter the secondaries market, we see established players moving into newer niches including venture capital and private credit secondaries.

Private Equity Secondaries Market Matures and Expands