The private equity industry is in the midst of its most prolific year ever, with buyout firms striking deals and spending cash like never before.
The surge in spending has been driven in no small part by mega-deals, like the $30 billion acquisition of Medline Industries that a trio of private equity heavyweights lined up in June. But it has also been fueled by a steady stream of smaller takeovers—“smaller,” in this case, meaning hundreds of millions of dollars instead of billions.
This middle market can be easy to overlook. But in some ways, it is the real engine of private equity. And as a new report this week on the state of the industry shows, that engine is pumping at an unprecedented rate.
Through the end of June, investors had completed 1,721 acquisitions in the U.S. middle market with a combined value of $264.6 billion, according to PitchBook’s latest report on the sector. Both numbers are on pace to set new decade highs. The uptick in activity can be traced to many of the same factors driving the larger buyout boom: Debt funding is easy to find. A strong stock market is driving valuations ever higher. And the recovery from the worst side effects of the pandemic was stunningly quick, aided by ample stimulus and relief dollars.
Just how quick of a recovery are we talking? Before the pandemic, the decade high for deal value in the U.S. middle market in any single quarter was $107 billion. After plunging to $57.4 billion during the pandemic-scarred second quarter of 2020, deal value jumped to $82.5 billion in Q3 and an all-time high of $146.1 billion in Q4. The first two quarters of 2021 also topped $107 billion—which means that, in terms of capital deployed, the past three quarters have been the three most active quarters on record in the middle market.
And we might just be getting started. Bankers are preparing for an onslaught of deals in the final few months of the year, which “may result in a Q4 spike similar to what we saw at the end of 2020,” according to PitchBook analysts Rebecca Springer and Jinny Choi. One reason for that crush of action is a simple desire to get deals done before the year is up. Another, perhaps more salient factor is that talk has burbled all year about a potential change in capital gains taxation. If a concrete plan to increase the tax rate on capital gains emerges, the rush of deals could be overwhelming, as small-business owners and other investors sprint to lock in profits at the current rate.
It isn’t only acquisitions: Middle-market investors are also selling companies at a record frequency. The market has hosted an estimated 430 exits with a combined value of $87.3 billion so far this year, per PitchBook’s report. The former figure is on pace to be the largest annual total on record, while the latter is on track for second place all-time.
It says something about the current state of the private equity landscape that those sorts of numbers can seem ho-hum. Springer and Choi describe the middle-market exit environment as “robust,” but not as robust as some other segments of the industry: “[W]e are not seeing the same stratospheric numbers in middle-market exits that we are in middle-market dealmaking or, for that matter, in US PE exits for companies over $1 billion in (enterprise value)."
Another note from the realm of middle-market exits is that secondary buyouts are making a comeback. For most of the past decade, sales of a portfolio company to another private equity firm have gradually grown more common, becoming the most popular exit path for middle-market investors. That shifted momentarily last year, when sales to corporate acquirers gained ground. But SBOs are back in style in 2021, accounting for nearly 62% of all middle-market exits so far.
The boom times also extend into the realm of fundraising. The 87 middle-market funds raised so far in the U.S. this year are again on track for a new record. And the $68.4 billion in capital raised so far is on pace to be the second-highest annual total since 2010.
Springer and Choi chalk up part of that fundraising surge to “LPs’ robust appetite for private markets exposure.” Many institutions are increasing the amount of capital they allocate to alternatives, and private equity is one of the most popular alternative options. The PitchBook analysts also point to another intriguing factor: The timeline of the PE industry seems to have accelerated, with valuations climbing so quickly that firms are able to line up exits earlier than expected, and thus return capital to LPs earlier than expected. In turn, many of these LPs are opting to pump their profits back into the successful firm’s next fund.
“Lofty valuations mean many GPs are seeing their investment goals achieved ahead of schedule, driving many to monetize investments earlier than anticipated,” the report says.
Add it all up, and one thing is clear: It’s a very good time to be a private equity investor. No matter how big of a private equity investor you may be.
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September 19, 2021 at 06:00PM
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An Unprecedented Year For Private Equity Is Spilling Into The Middle Market - Forbes
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