US private equity activity has seen record-breaking levels of activity in the first half of 2021, fueled by rock bottom interest rates and sky-high levels of unallocated capital.

Global private equity dry powder is at an all-time high of US$1.9 trillion as of January 2021—despite the fact that fundraising slowed in 2020 as investors stepped back from committing capital to new funds to focus on their existing portfolios, according to data from Preqin. Annual US private equity fundraising in 2020 dropped 38.4 percent by value to US$203.2 billion and 36.6 percent by volume at 231 funds, according to Pitchbook. Although down from 2019 levels, fundraising results were still healthy when compared to previous years in the past decade.

With so much capital available to private equity managers, deal activity has surged in the back half of 2020 and into 2021. Buyout deal activity in Q1 2021 reached record quarterly highs for volume and value—only for Q2 to break the value record again. Total buyout deal value of US$354.2 billion for H1 2021 has already surpassed 2020's annual total of US$257.3 billion. Volume for H1 came to 993 deals, compared to 635 in H1 2020 and 1,429 across the whole of 2020.

View full image: US private equity buyouts 2016 – H1 2021 (PDF)

Rich valuations

The amount of capital chasing deals, including from SPACs, has caused valuations to spike, with US buyout multiples averaging 11.4x EBITDA in 2020 and more than two-thirds of US deals pricing above 11x EBITDA, according to Bain & Co. This has raised some concern about the market becoming frothy, although it has been noted that buyout interest has coalesced around a handful of high-quality assets in resilient sectors such as technology, healthcare and business services. Valuations may be full, but the bar for acquisitions remains high, with firms only stretching for the most desirable targets.

The largest deal of the first half—the US$34 billion buyout of medical supply manufacturer Medline by a consortium comprising Carlyle, Hellman & Friedman, Blackstone and Singaporean sovereign wealth fund GIC—is emblematic of this trend. As a manufacturer of medical masks and gowns, biohazard sanitation equipment and hand sanitizer, Medline has seen demand surge during the pandemic, and the deal is not only the largest US PE buyout since 2007, but among the largest ever.

As the economy opens, there are signs that private equity firms are seeing opportunities to invest in businesses operating in sectors hardest hit by the pandemic at attractive valuations.

A prominent example of this trend was the acquisition of car rental group Hertz by Apollo Capital, Knighthead Capital and Certares. The US$5.9 billion buyout offer came a year after Hertz filed for bankruptcy in May 2020 amidst pandemic-related disruption.

As sectors other than technology, healthcare and business services open up, private equity firms are expected to start seriously considering deals for targets across a broader mix of industries. This will help firms to manage dry powder and keep to their schedules for deploying capital.

Exit environment

High prices have enabled firms to achieve attractive valuations when selling assets. There were 356 exits worth US$117.3 billion in total in Q1 2021. This was a 41 percent rise in volume on Q1 2020, and a 139 percent increase in value.

The largest exit of the year was another example of a pandemic-related boost to valuations in the healthcare sector. Thermo Fisher, a US-based manufacturer of laboratory instruments, announced it would acquire PPD, a contract research organization (CRO) for the pharma industry. The US$21 billion deal will see investors GIC, Abu Dhabi Investment Authority, Hellman & Friedman and Carlyle exit from the company.

Cash-rich SPACs have further fueled the market. Although competitors to private equity firms in buyout scenarios, SPACs have provided an attractive liquidity strategy for firms when selling. SPAC deals have seen buyout firms able to sell down stakes in prized assets, but also retain minority stakes in them if desired. 

CVC, Leonard Green & Partners and Bain Capital, for example, rolled over a portion of their stakes in marketing agency Advantage Sales & Marketing and paid down debt after a US$5.2 billion deal with the Conyers Park II Acquisition SPAC.

View full image: US private equity exits 2016 – H1 2021 (PDF)

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