Q3 2021 M&A highlights

  • In Q3 2021, North American private equity transaction volume continued apace[1], and expectations remain in place for a robust and steady stream of sponsor-backed deals throughout the remainder of 2021
  • We believe this current pace, driven by pent up demand and record levels of uncommitted capital[2], will almost certainly set records for YoY PE driven deal volumes and value

(Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

  • As seen in the graph below, sale multiples continued to elevate in Q3 2021, supported, for now, by increasing availability of low-cost leverage loans and higher leverage levels[3]

(Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

  • Additionally, fundraising continued at a record pace in Q3[4], so while not at 2019 spike levels shown above, funds continue to be raised and create an even larger imbalance in uncommitted PE capital and continued aging of existing dry powder
  • This also adds to the pressure on private equity firms to transact, driving higher multiples for sought-after, robust assets, and maintaining deal momentum for the quarter

(Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

(Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

  • Despite the relatively positive ‘dealmaking climate’, there are signs that resistance to even higher multiples could be on the horizon. Headwinds, such as the factors listed below, could temper multiples and deal terms:
    • Lower quality of sell-side assets at this later stage in the deal flow cycle, ie ‘best of breed’ sellers have completed transactions already
    • The asset’s pandemic story
    • Uncertainty regarding changes to capital gains tax (CGT) rates - currently at 20%, with proposals ranging from 25% to 39.6%[5] (matching the top marginal rate on ordinary income) – as new CGT regimes (including potentially retroactive changes) are required because the US government is looking at mechanisms to repay its pandemic debt
    • ESG implications of any acquisition, as ESG is undoubtedly a core investor concern, but without a uniform / formal set of metrics, sponsors are relying on proprietary frameworks
    • Potential for a decline in appetite for cyclical sell-side volume in Q4 2021, as fiscal policy and macroeconomic factors create variability in future cash flow estimates
    • Impact of recent and expected interest rate spikes that could undermine support for rate-sensitive growth company valuations in technology and software, and business and tech-enabled services
  • In addition to the factors listed above, the availability of resources at every stage of the buyer and seller’s M&A processes, as many industries face a talent shortage[6] could hinder processes and therefore deal volumes in Q4 2021
  • The trend toward ‘recycled’ LP capital continued in the third quarter, driven by:
    • record reinvestment and reallocation at the limited partner level; and
    • increased reinvestments of excess returns, which were used to make larger commitments
  • Evidence of this trend is further illustrated by the fact that the median ‘step up’ for new vintage funds - seen on the graph below - has jumped[7], whilst significant new and spin-off fund manager raise activity is increasingly finding LP funding

(Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

  • The result is that competition will likely continue to be fierce in the mid-market. Deals in this segment accounted for almost 65% of US private equity deal count in Q1/Q2 according to PitchBook data[8], which is the highest annual proportion on record

 (Source: ‘Q3 2021 US PE Breakdown’, Pitchbook, Oct 11 2021)

A view from our experts


  • The last twelve-month loan default rate at the end of September 2021 stood at 0.35% by loan amount[9] as compared to 4.17% at the end of September 2020[10], signalling very little restructuring activity as the capital markets remain open
  • The distress ratio stood at 0.72% at the end of September 2021[11]. This is measured as the share of loans priced below 80% of par and this measure has historically been used as a predictor of future distress in the market – if below 1%, there is a reduced amount of stress in the market
  • As indicated by the rating agencies, the distress ratio decline from its peak of 35% in March 2020 was attributed to accommodative financing markets[12]
  • The most notable improvement in the distress ratio comes from the oil and gas sector - previously one of the most distressed and thus, has a large impact on the level of distress in the market - which benefitted from the favorable refinancing markets and higher oil and gas pricing
  • The price of West Texas Intermediate (WTI) increased from $48/barrel at 12/31/2020 to over $75/barrel at 10/1/2021[13], indicating an increase in investment appetite in the market

Asia Access

Q3 insights

  • Overseas M&A interest from Asia continues, particularly across technology and software, industrials, and biotechnology, with recent transactions demonstrating Asian countries’ aggressive approach toward overseas growth via M&A:
    • Toppan Printing’s announcement of the acquisition of InterFlex Investment Holdings, Inc. (a flexible packaging provider) from Nicolet Capital Partners[14]
    • Dentsu Group’s announcement of the acquisition of LiveAreaLabs (a digital creative agency) from PFSweb for a consideration of USD 250m[15]
  • Covid-19 travel restrictions still remain in place, but Japanese and Korean companies are leaning more towards outbound M&A activity to facilitate growth in a wide range of industries
  • Inbound M&A activity from China remains limited, primarily due to political tension between China and the US - it has been increasingly difficult for Chinese buyers to acquire companies and/or assets in the US, which has negatively impacted deal flow
  • Market interest in Japan has also risen to the surface in Q3, as we saw several transactions announced by US corporates in which they acquired Japanese companies to strengthen their presence in Japan and Asia and capture the high growth of particular markets in Japan, such as digital payment and high-end consumer goods. In particular, adoption of digital payment has been slow in Japan, where ‘cash is king’, but now is considered one of the most promising markets for M&A activity. This interest is represented by:
    • Foot Locker’s announcement of the acquisition of Atmos, a high-end sneaker retailer in Japan, for USD 360m[16]
    • Alphabet’s announcement of the acquisition of Pring, a developer of the money communication application for smart phones, for USD 85m[17]
    • Paypal’s acquisition of Paidy, a two-sided payments platform and provider of “buy now pay later” solutions in Japan, for USD 2.7billion[18]

Outlook for Q4 & beyond

  • We expect cross-border acquisition activity by Asian corporates to be accelerated by the relaxation of travel restrictions, especially for industrials and other manufacturing related sectors that traditionally require physical site visits
  • Although the impact of Covid-19 variants (including Delta) is still uncertain, many Asia-based corporates have started to approach US targets to initiate the dialogue on acquisitions
  • We also anticipate continued appetite from Japanese corporates in acquiring US-based software providers, to transform business models and absorb new technologies - resulting in an expected increase in technology and software deals
  • Vaccination rates in Japan have finally caught up with the US (67.2% of the public have had at least one dose, and 55.1% are fully vaccinated as of September 21 2021[19]). This will likely have a positive impact on the resurgence of work-related travel, in areas such as site visits and in-person management meetings, which should enhance cross-border business activity and, subsequently, deals

Indsutry commentary