April 2021

Private equity’s rapid rebound from the effects of the pandemic can be seen in the activity data for the first quarter, which spans buyouts and venture capital deals, as well as fundraising. Although buyout activity could not keep pace with the effervescent fourth quarter of 2020, private equity investors agreed $133 billion of deals according to Preqin data, an increase on the largely pre-pandemic same period of last year.

Fundraising was also back on track with $188 billion raised by sponsors, a 16% increase year-on-year1. Perhaps most notable was the surge in venture capital activity with global investment more than doubling to $133 billion. The U.S. accounted for more than half the funding for start-ups{{2}}{{{Inside the US’ epic first-quarter venture capital results</br>Source: Tech Crunch}}}, underlining Silicon Valley’s pre-eminence when it comes to venture capital.

Innovation is proving to be more global, however. India created six new unicorns worth more than $1 billion in funding rounds concluded in just four days in April – compared with seven created in all 2020{{3}}{{{Six New Unicorns in Four Days Marks Historic Boom for India Tech</br>Source: Bloomberg}}}. The UK, meanwhile, shook off the effects of Brexit to register a 25% increase in start-up investment in the first quarter to £5.1 billion, with seven of the ten largest funding rounds in Europe, including almost £300 million for events platform Hopin and £500 million for property lender LendInvest{{4}}{{{Brexit fails to deter investment in UK with record £5.1bn funnelled into start-ups</br>Source: The Telegraph}}}.

Auctions Remain Heated as Sponsors Move Quickly

Deals continue to come thick and fast, fuelled by large reserves of private equity dry powder and expectations of a return to normal – despite the reintroduction of lockdown measures in some countries in the EU to counter a third wave of COVID-19 infections. Auctions remain the norm for attractive assets, with seller-friendly terms persisting. The result has inevitably been full prices for acquisitions, although ability to execute and deal certainty are also very high priority for sellers.

A growing number of European deals have been concluded with unexpected speed, with sponsors willing to submit pre-emptive bids to secure assets before competitive auctions start in earnest. EQT pre-empted the process with its €4.5 billion buyout of Cerba, the French laboratory services group. Similarly, Ardian was reported to have taken just two days to agree to buy a majority stake in German laboratories group GBA{{5}}{{{Quick-Fire Dealmakers Are Fueling a $129 Billion Buyout Boom</br>Source: Bloomberg}}}.

Being able to act quickly does not necessarily mean taking greater risk. By following the performance of potential targets – and engaging early and proactively when processes are being set up – private equity firms can significantly de-risk deals. As we noted in last month’s Private Equity Market Snapshot, being prepared can enable sponsors to evaluate and manage key areas of risk, access warranty and indemnity insurance and understand anti-trust threats, among others.

Deal-making remains most robust in sectors driven by secular trends, such as healthcare, technology, and fintech, although there are also green shoots in sectors that are tied to recovery, such as infrastructure and travel-related industries, as well as building services and construction. In mid-April, Terra Firma, the private equity firm founded by Guy Hands, agreed a £110 million deal to buy the housebuilding arm of infrastructure and building contractor Kier Group.

The pace of activity has raised questions over whether it can continue. Indeed, economic recovery may be factored into many asset prices. As a result, any further disruption to the roll-out of vaccines – as experienced in the EU in the first quarter – or new COVID variants that prompt further economic restrictions, may curtail deal activity and dampen sellers’ valuation expectations.

Asian Investor Appetite for European Assets Strengthens

As activity has picked up globally, inbound interest from Asia has been strong. In March, Chinese private equity firm Hillhouse Capital agreed a €3.7 billion deal to buy the appliances business of Dutch electronics firm Philips{{6}}{{{Philips Sells Appliances to Hillhouse in $4.4 Billion Deal</br>Source: Bloomberg}}}. The deal highlights Asia-based sponsors’ appetite for assets – and brands – that they can help develop and market at home to potentially large consumer bases. As a result, consumer products and pharma have been among the sectors in focus.

Underlining that demand, Chinese private equity firms are targeting record fundraisings this year. Among those, Hillhouse is reported to be raising $13 billion for new investments, while Boyu Capital is targeting $6 billion, and Primavera, run by Goldman Sachs’ former chair for Greater China, is seeking $5 billion{{7}}{{{Chinese private equity targets record fundraisings</br>Source: The Financial Times}}}.

While much of their firepower may be invested at home and across the Asia Pacific region, raising dollar funds allows Chinese sponsors to be more agile and competitive in fast-moving European processes. Some Asian investors are concerned about the potential for greater scrutiny of foreign direct investment in Europe since COVID, but private equity firms can prepare for examination of their deals by having clear plans for assets, as well as answers to regulators’ likely questions.

Michael J. Preston

T: +44 20 7614 2255

Gabriele Antonazzo

T: +44 20 7614 2353

Michael James

T: +44 20 7614 2219