A view from our experts

Q1 2021 M&A highlights

  • Q1 2021 transaction data continues to signal support for a robust and steady stream of sponsor-backed deals throughout CY2021[1]
  • While private equity (PE) exits showed sequential gains in the first calendar quarter of 2021[2] – a trend we expect to continue in Q2 and Q3 2021 – exits were below the very high expectations on the back of the November 2020 elections
  • This lighter-than-expected exit volume was due in part to the quality of assets coming to market (ie more 'B' and 'C' assets), and a slower than expected rotation towards more cyclical sell-side volumes such as Industrials - thanks to a less robust economic recovery than expected in the first quarter of 2021
  • Fundraising, however, continued apace in Q1 2021, creating an even larger imbalance in uncommitted PE capital and continued aging of overall dry powder – this suggests sponsors are under even more pressure to deploy such capital with relative urgency
  • In H2 2020, businesses with strong pandemic results were highly sought after, and as 2021 progresses, even businesses with less robust 2020 results will, we expect, begin to show strength and garner interest
  • ‘Pandemic stories’, however, are seeing pushback from buyers looking for 12 months of demonstrable results indicating how businesses will perform post-Covid
  • That said, with the economic pick-up in late Q1 2021, and with economists predicting a very strong outlook for Q2 and Q3 2021, we expect sponsors will stretch in order to get in early on the ‘rotational trade’. These sponsors have and will continue to overshadow those buyers reluctant to transact without 12 months of post-Covid results, creating a ‘rotational trade snowball effect’ in the market
  • In our view, this combination of factors suggests exit multiples will remain at least steady, and in some preferred sectors, could actually rise on a per-deal basis from already elevated levels
  • Finally, a ‘wildcard’ of perhaps great importance to deal volumes as 2021 moves forward is the anticipated speculation of substantial increases in US capital gains taxes[3], which may override all other factors impacting exit volumes in a race to complete transactions by YE2021

 

 

Restructuring

  • US federal stimulus continues to support capital markets with increased debt issuance and senior leveraged loan volume of $214 bn plus high-yield bond volume of $152 bn for Q1 2021 - levels that have surpassed 2007[4]
  • April also marks a six-year low for the distressed high-yield universe[5]
  • The volume of bonds trading at or below $70 is now $9.9 bn (0.7% of the non-defaulted universe) vs. $226 bn or 17.4% in March 2020[6]
  • The lagging 12-month default rate stood at 3.15% in March 2021 (42 issuers) vs. 3.25% in February 2021 and 1.84% (24 issuers) in March 2020, as Q2 2020 witnessed over 30 defaults[7]. The default rate is anticipated to decline considerably in Q2 2021

Private Capital

  • The first quarter of 2021 continued the strong momentum of 2020 with $52 bn invested across 1,291 deals[8] - the largest amount of capital invested in growth equity companies on record, driven by numerous billion-dollar-plus mega deals and general market enthusiasm
  • The Q1 figure is $16 bn higher than the previous quarterly record set in 2018, and the first time deal count has exceeded 1,000 in a quarter[9]. We expect this trend to continue as record amounts of uncommitted capital are also available to growth equity funds
  • In our view, the strength of the IPO and SPAC market will create a recycling of capital such that LPs will commit more to venture, growth equity, and PE funds due to myriad successful exits
  • SPAC vehicles are, in a sense, supplying minority stake primary capital to private companies with larger enterprise values interested in becoming publicly listed; supplanting some deals that would historically have been completed in the private market
  • While virtual deal-making is the new norm, we are seeing an increase in growth equity investor professionals working from the office now, mainly due to their generally smaller staff sizes. More investors are willing to meet companies in person prior to closing on a deal, which can make for a smoother closing process

Asia Access

Q1 insights

  • Interest in overseas M&A from Asia remains strong, particularly across the Technology & Software, Consumer, Healthcare and Industrials sectors, with some of the more recent notable announcements demonstrating Japan’s aggressive stance toward overseas growth via M&A:
    • Hitachi’s announcement of the acquisition of GlobalLogic for $9.6 bn[10]
    • Takeda Pharmaceutical’s announcement of the acquisition of Maverick Therapeutics for $525 m[11]
  • The disposal of non-core assets has also been active in the space, with Japanese companies leaning more towards outbound M&A activity to seek growth
  • In Q1 2021, although there are still strong travel restrictions in place across Asia, we have witnessed the resurgence of business-related travel, in an effort to complete due diligence / PMI in transactions – a signal of a return to business as usual

Outlook for Q2 & beyond

  • Following the release of new mid-term business plans from Asian corporations, we expect to see continued or more aggressive growth strategies – leveraging M&A to expand their platforms into the US, transform business models and absorb new technologies
  • We also anticipate large appetite from Japanese corporates in more software-driven business models this year, generating more M&A opportunities for US-based software providers, with a view to creating more sustainable and diversified business models
  • The Biden administration’s agenda on infrastructure investments is likely to enhance cross-border M&A appetite in the Infrastructure and construction-related space from Asia, with the number of inbound approaches to US targets increasing
  • Finally, a growing awareness of ESG is expected to act as a key criterion for Japanese companies selecting M&A targets for cross-border transactions across a wide range of industries (ie cleantech, green energy, biodegradable products, carbon-neutral) - which could result in an uplift in US M&A given the progress mid-market businesses have made in the past 12 months

 

References

[1]Q1 2021 US PE breakdown”, Pitchbook, 9 April 2021

https://pitchbook.com/news/reports/q1-2021-us-pe-breakdown

[2]Q1 2021 US PE breakdown”, Pitchbook, 9 April 2021

https://pitchbook.com/news/reports/q1-2021-us-pe-breakdown

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

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

[4]LCD Global Loan Stats – Quarterly”, Global Market Intelligence, S&P, 12 April 2020

https://www.lcdcomps.com/lcd/n/home.html?ds

[5]LCD Global Loan Stats – Quarterly”, Global Market Intelligence, S&P, 12 April 2020

https://www.lcdcomps.com/lcd/n/home.html?ds

[6]LCD Loan Defualt List”, Global Market Intelligence, S&P, 12 April 2020

https://www.lcdcomps.com/lcd/n/home.html?ds

[7]LCD Loan Defualt List”, Global Market Intelligence, S&P, 12 April 2020

https://www.lcdcomps.com/lcd/n/home.html?ds

[8]NVCA Q1 Venture Monitor”, Pitchbook, 14 April 2021

https://files.pitchbook.com/website/files/pdf/Q1_2021_PitchBook-NVCA_Venture_Monitor.pdf

[9]NVCA Q1 Venture Monitor”, Pitchbook, 14 April 2021

https://files.pitchbook.com/website/files/pdf/Q1_2021_PitchBook-NVCA_Venture_Monitor.pdf

[10]  “Hitachi to Acquire GlobalLogic, a Leading U.S.-based Digital Engineering Services Company”, Hitachi, 31 March 2021

https://www.hitachi.com/New/cnews/month/2021/03/210331.html

[11]Panasonic to buy Blue Yonder for $6.5 billion in biggest deal since 2011: Nikkei”, Reuters, 8 March 2021

https://www.reuters.com/article/us-blueyonder-m-a-panasonic-idUSKBN2B00UU