Aerospace, Defense & Government Services

  • Current M&A volumes and pipeline in the sector are robust, with significant strategic and PE activity, suggesting this is likely to be a record or near-record year
  • Companies that enable government transformation - both digital and workforce - continue to be in high demand as federal agencies have been tasked with radically altering the delivery of services to citizens, whilst confronting critical issues around aging systems and workforces  
  • The Biden administration’s proposed $2 trillion infrastructure bill includes spending for areas outside of traditional infrastructure, that would increase funding at civilian agencies - including The Department of Health Human Services, the Department of Veteran Affairs, Department of Housing and Urban Development, Department of Education, and United States Environmental Protection Agency among others - benefiting companies with exposure to these agencies[1]
  • To fund the infrastructure bill, Biden has proposed raising the corporate tax rate from 21% to 28%[2], which both buyers and sellers should be mindful of when considering their M&A plans
  • The Biden administration has requested a defense budget of $753bn for the next fiscal year - an increase of 2% over the current year[3]

Business & Tech-Enabled Services

  • Global IT spend is expected to grow at 8.4% in 2021, after a 2.2% contraction in 2020[4], driven by investments in business-led requirements (eg technology to support hybrid learning / work environments)
  • Cloud migration services are increasingly attractive investment opportunities in our view due to the innovative nature of the market, with 40% of enterprise workloads predicted to deploy in Cloud PaaS by 2023[5]
  • Legacy technology segments are under more pressure this year to invest in domain-specific knowledge and higher value-added services eg AI or user experience technologies, in turn creating an expected uptick in M&A activity across the space
  • Current robotic process automation (RPA) scaling limitations, including the inability to perform certain human-free processes, have led to a robust market demand for improved data ingestion and automation – increasing the need for skilled RPA implementation and ongoing service providers, creating more investment opportunities[6]

Travel & Hospitality

  • Q1 2021 saw robust transaction activity, which slightly surpassed transaction activity for Q4 2020[7]. Strategic M&A amidst travel & hospitality technology companies continues to be heavily influenced by pandemic-induced trends of digitalization and touchless hospitality experiences
  • Throughout the remainder of 2021, we expect capital markets to show a continued interest in the niche sectors that demonstrated value throughout the pandemic, such as alternative accommodation platforms, experiential travel and remote living / working
  • Global and domestic travel trended upward in Q1 2021 as some countries began to see the rollout of vaccinations and the US Government gave the green light for fully vaccinated Americans to travel. Q1 2021 ended with about 17% of the US population vaccinated[8]
  • The hotel sector ended Q1 2021 with occupancy rates in the US of ~60%[9], which is considerably higher than the ~50% occupancy seen throughout most of the pandemic[10]. This growth in occupancy rates is believed to be driven by consumers acting on pent up demand as well as increased confidence in public health safety as vaccine rollouts continue and state governments expedite reopenings[11]
  • Local travel witnessed significant growth in March 2021, demonstrated by the surging demand for Ubers - as people emerge from lockdown and many local governments encourage reopenings - which has led the company to launch a $250 m driver stimulus boost to help meet demand[12]
  • Leisure travel continues to outpace business travel and drive gradual recovery in the airline and hotel sectors – a trend that is expected to continue through most of 2021 as pent-up demand for travel will be realized
  • We anticipate that consumer travel’s return will likely drive up M&A activity in the coming year. Many incumbents and PE funds will be looking towards consumer-facing platforms to make up for lost acquisition time during the pandemic. As the casual traveller will likely be more active than the more cautious business traveller, expect consumer-facing platforms to draw more attention

Education & EdTech

  • PEs continue to strongly value software-based sectors such as EdTech which therefore have demonstrated investment resilience throughout the pandemic
  • A barrier to entry for newcomers is likely to be the expense of digital content creation, given the high quality delivery that is expected from learners
  • The potential for capital gains tax rate changes[13] – a result of the new Biden administration – is expected to push sellers into the market for many companies that are approaching the end of their hold periods
  • Buyer frustration over prevailing high valuations has been increasing, but there’s a real reluctance to miss out, so buyers continue to aggressively deploy capital
  • Consequently, M&A activity in the Education space this year is expected to remain strong

Industrials

  • As seen below, M&A activity levels continued to increase into Q1 2021, with deal volumes up relative to Q4 2020 which, in our view, was negatively impacted by factors related to Covid-19
  • Industrial corporates are placing increased importance on portfolio pruning and potential divestitures, to increase focus on core lines of business to drive future growth. There is also growing emphasis on lines of business that are favorably positioned related to ESG themes which will be important considerations for how corporates choose to allocate capital and M&A activities in the future
  • A continuing rebound in US employment is bolstering confidence levels in industrial corporates with respect to their future performance and a desire to position their business to capitalize on positive economic growth
  • The overall improving macroeconomic environment has strengthened increasing levels of buy-side interest in acquisitions from corporates and private equity, both within the US and abroad

Tech & Software

  • As enterprise and small and midsize business (SMB) customers accelerate cloud adoption and working from home, the cybersecurity market continues to grow rapidly.
  • The need for companies to secure their ‘environments’ against increasingly sophisticated cyber threats, has meant cybersecurity companies continue to perform well resulting in attractive tuck-in opportunities for large strategic businesses seeking to round out their suite of offerings to better serve distributed workforces
  • While recurring revenue cyber models (software and services) continue to fare well, travel restrictions and customer budget pressures have in some cases lengthened new business sales cycles; companies with offerings that have suddenly become critical in the remote pandemic environment are seeing increased, urgent demand
  • M&A remains strong, with several multi-billion dollar high-profile deals in Q1 2021 such as STG's acquisition of McAfee's enterprise business ($4 bn)[14] and Okta's acquisition of Auth0 ($6.5 bn)[15]. Overall, the cyber M&A market saw 66 deals close at a total $20 bn[16] in disclosed transaction value, showing an up-tick in M&A from 46 deals and $8.6 bn in transaction value from Q1 2020[17]
  • Private capital markets continue to exhibit strength with over fifteen +$100m raises in Q1 2021 alone[18] - specific subsectors of interest include fraud prevention, cloud security, and identity and access management. Overall, the private capital market saw 94 deals and $8.7bn in disclosed transaction value for investments of $5 ml or greater[19], an increase M&A activity from 46 deals and $8.6 bn in transaction value in Q1 2020[20]
  • High-growth areas, such as cloud security, managed detection and response (MDR), security automation, orchestration and response (SOAR), secure access service edge (SASE), zero-trust network access (ZTNA), DevSecOps and fraud prevention attracted both significant investor and acquirer interest at premium valuations – for example, the sale of Redscan to Kroll (formerly Duff & Phelpls) and iboss’ capital raise
  • Annual recurring revenue (ARR) multiples well into double digits are achievable, in our view, for enterprise-focused SaaS-based businesses growing

 

Back to our US Private Equity Mid-Market Monitor Q1 2021 Overview

 

 

References

Source for all charts above: Total number of deals completed by sector, Mergermarket, YTD 31 March 2021

[1]Fact sheet: The American Jobs Plan”, The White House, March 31 2021

https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

[2]Fact sheet: The American Jobs Plan”, The White House, March 31 2021

https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan/

[3]Biden requests $715B for Pentagon, hinting at administration’s future priorities”, DefenseNews, 9 April 2021

https://www.defensenews.com/breaking-news/2021/04/09/biden-requests-715b-for-pentagon-hinting-at-administrations-future-priorities/

[4]Gartner Forecasts Worldwide IT Spending to Reach $4 Trillion in 2021”, Businesswire, 7 April 2021

https://www.businesswire.com/news/home/20210407005595/en/Gartner-Forecasts-Worldwide-IT-Spending-to-Reach-4-Trillion-in-2021

[5]Predicts 2021: Cloud and Edge Infrastructure”, Gartner, 7 April 2021

https://www.gartner.com/en/doc/735107-predicts-2021-cloud-and-edge-infrastructure

[5]Gartner Predicts RPA Will Grow Significantly In 2020 As Part Of Hyperautomation”, RPAToday, 22 January 2020

https://www.gartner.com/en/doc/735107-predicts-2021-cloud-and-edge-infrastructure

[7] ‘Transactions data’, Pitchbook, 15 April 2021

https://pitchbook.com/data

[8] COVID Data Tracker, CDC, 15 April 2021

https://covid.cdc.gov/covid-data-tracker/#datatracker-home

[9]The Week That U.S. Travel Started its Recovery”, Skift, 2 April 2021

https://skift.com/2021/04/02/the-week-that-u-s-travel-started-its-recovery-by-the-numbers/

[10]The Week That U.S. Travel Started its Recovery”, Skift, 2 April 2021

https://skift.com/2021/04/02/the-week-that-u-s-travel-started-its-recovery-by-the-numbers/

[11]TSA Traveller Throughput”, Transportation Security Administration, 15 April 2021

https://www.tsa.gov/coronavirus/passenger-throughput

[12]Getting Drivers Back on the Road”, Uber, 7 April 2021

https://www.uber.com/newsroom/getting-drivers-back-on-the-road/

[13]Topic No. 409 Capital Gains and Losses”, IRS, 12 March 2021

https://www.irs.gov/taxtopics/tc409

[14]McAfee Announces Sale of Enterprise Business to Symphony Technology Group for $4.0 Billion”, McAfee, 8 Mar 2021

https://www.mcafee.com/enterprise/en-us/about/newsroom/press-releases/press-release.html?news_id=99600ca9-4df7-41a5-9a0d-63d00b04a625

[15]Okta Signs Definitive Agreement to Acquire Auth0 to Provide Customer Identity for the Internet, Okta, 3 March 2021

https://www.okta.com/press-room/press-releases/okta-signs-agreement-to-acquire-auth0/

[16] Pitchbook, 14 April 20201

Search criteria: Deal size: >$5M, Deal Types: Growth/Expansion, All VC Stages, Verticals: Cybersecurity, Geography: Global

[17] Pitchbook, 14 April 20201

Search criteria: Deal size: >$5M, Deal Types: Growth/Expansion, All VC Stages, Verticals: Cybersecurity, Geography: Global

[18] Pitchbook, 14 April 20201

Search criteria: Deal size: >$5M, Deal Types: Growth/Expansion, All VC Stages, Verticals: Cybersecurity, Geography: Global

[19] Pitchbook, 14 April 20201

Search criteria: Deal size: >$5M, Deal Types: Growth/Expansion, All VC Stages, Verticals: Cybersecurity, Geography: Global

[20] Pitchbook, 14 April 20201

Search criteria: Deal size: >$5M, Deal Types: Growth/Expansion, All VC Stages, Verticals: Cybersecurity, Geography: Global