A view from our experts

Q2 2021 M&A Highlights

  • Q2 2021 transaction data continues to signal support for a robust and steady stream of sponsor-backed deals throughout the remainder of 2021[1]. We believe the current pace, driven by pent up demand and record levels of uncommitted capital, will almost certainly set year-over-year private equity (PE) deal volume and transaction value records

Source: “Q2 2021 US PE breakdown”, Pitchbook, 9 July 2021

  • As such, PE exits completed at a record pace in H1 2021[2] – a trend, driven by continued pent up demand / uncommitted capital imbalance, that we expect to continue in H2 2021

Source: “Q2 2021 US PE breakdown”, Pitchbook, 9 July 2021

  • Already elevated sale multiples continued in Q2 2021, supported by increasing availability of low-cost leverage loans and higher leverage levels[3].  However, headwinds, such as those outlined below, have begun to signal some resistance to even higher multiples. Going forward, we expect multiples and deal terms will be tempered by the:
    • Quality of assets at this stage in the cycle
    • Individual Covid-19 impact on each potential transaction
    • Uncertainty regarding changes to capital gains rates and the potential for retroactive treatment
    • ESG implications of any acquisition, which are now taking center stage within investment committees’ discussion and decisions until more formalized and uniformly accepted ESG metrics settle out
  • Expected appetite for cyclical sell-side volume, such as Industrials, finally picked up in Q2 2021, thanks to more robust economic data pointing toward continued recovery and GDP growth throughout the remainder of 2021[4]
  • At the same time, interest rates remain low[5], supporting growth company transactions in Technology & Software, and Business & Tech-Enabled Services
  • Fundraising continued at a record pace in H1 2021[6], creating an even larger imbalance in uncommitted PE capital and continued aging of overall dry powder. Subsequently, sponsors are under even more pressure to deploy such capital with relative urgency
  • Exacerbating this trend is that ‘recycled’ LP capital remains the norm, driven by record amounts of reinvestment and reallocation at the limited partner level, with an additional portion of recent excess returns reinvested to make even larger commitments available, and looking for new vintages of funds and new managers
  • Evidence of this trend is that the median ‘step up’ for new vintage funds has jumped while, at the same time, significant new and spun off fund manager raise activity is increasingly finding LP funding
  • It appears that the dislocation in the fundraising market due to the pandemic has ended, as the overall fundraising marketplace emerges from the 2020 doldrums
  • Despite headline-grabbing large exit transactions through public listings or SPAC mergers, limited partner fund flows remain focused on middle market funds and, thus, M&A deal count and dollar transaction values are overwhelmingly driven by private middle market platform and add-on activity below $1B in transaction size[7]

Source: “Q2 2021 US PE breakdown”, Pitchbook, 9 July 2021

Source: “Q2 2021 US PE breakdown”, Pitchbook, 9 July 2021

  • In our view, this combination of factors suggests a ‘sweet spot’ for DC Advisory’s mid-market M&A focus, which should continue to provide our PE clients with record exit levels and increased acquisition deal flow throughout the remainder of this year

Source: ‘Private equity uncommitted capital by year’, Mergermarket, 30 June 2021

Restructuring

  • The distressed debt market continues to be relatively benign, despite the chapter 11 bankruptcy protection filing of Washington Prime in June[8]
  • The last twelve month loan default rate at the end of June 2021 stood at 1.25%[9] - the lowest point since May 2019 at 1.00%[10]
  • The distress ratio stood at 1.02% at the end of June 2021[11], compared to the prior low point of 0.59% in November 2014[12], as loans have traded up
  • As the price of West Texas Intermediate (WTI) has reached its highest levels since 2018[13], the universe of energy distress, as measured by trading price, has declined and distressed investors are evaluating bespoke investment opportunities in the SPAC universe, companies impacted by political and ESG considerations, and reopening plays (retail and travel related companies, theaters etc)

Private Capital

  • The first half of 2021 continued to see records broken with over $100 bn invested across 2,564 deals[14]– nearly surpassing the full year of 2020, which itself was the largest amount raised on record
  • Clearly 2021 will finish with a record amount of capital raised, driven by numerous billion-dollar-plus mega deals and general market enthusiasm
  • 83% of late stage capital raised in the first six months was in rounds of $50 million or more; these deals made up just 45% of capital raised in 2011[15]. We expect this trend to continue as record amounts of uncommitted capital are available to growth equity funds
  • The strength of the IPO and M&A market is creating a recycling of capital such that LPs are committing more to venture, growth equity, and PE funds due to myriad successful exits
  • The slowdown in the SPAC market may drive more capital allocation into the private market, as many of the companies that previously could sell to SPACs may now need to raise capital in the private market
  • While virtual deal-making is the new norm, we are seeing an increase in growth equity investors working from the office, 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

Q2 insights

  • Interest in overseas M&A from Asia remains strong, particularly across the Technology & Software, as well as Infrastructure and Logistics, with some of the more recent notable announcements demonstrating Japan’s aggressive stance toward overseas growth via M&A:
    • Panasonic’s announcement of the acquisition of Blue Yonder (supply chain software provider) for $7.1 bn[16]
    • Mitsubishi HC Capital’s announcement of the acquisition of CAI International (freight and transportation service provider) for $2.7bn[17]
  • Covid restrictions limiting travel still remain in place, but Japanese companies are leaning more towards outbound M&A activity to facilitate growth. Many have announced they will aggressively attempt cross-border M&A activity during their next mid-term plan to align with foreign market opportunities

Outlook for Q3 & beyond

  • Vaccinations in Japan have finally started to pick up and will likely have positive impact in the resurgence of work-related travel to enhance cross-border business activities, including M&A, due diligence, and in-person negotiations
  • We expect this relaxation of travel restrictions will accelerate cross-border acquisition activity by Japanese corporates, especially for Industrials and other sectors that often require physical site visits to assess manufacturing facilities
  • We also anticipate continued appetite from Japanese corporates in acquiring US-based software providers, to transform business models and absorb new technologies
  • Finally, we expect to see more ESG-related acquisitions, such as renewable energy and other cleantech businesses, driven by companies’ carbon neutral strategies

 

 

Source for all charts above: “Q2 2021 US PE breakdown”, Pitchbook, 9 July 2021