The coming six months will bring increasingly stiff competition for more private equity deals at higher prices that demand larger fund sizes, going beyond the significant rebound that had been reported six months ago, according to the autumn 2021 edition of the DealCloud Dealmaker Pulse Survey Report by Intapp.
The coming six months will bring increasingly stiff competition for more private equity deals at higher prices that demand larger fund sizes, going beyond the significant rebound that had been reported six months ago, according to the autumn 2021 edition of the DealCloud Dealmaker Pulse Survey Report by Intapp.
Among the 89 per cent of private equity survey respondents who said their firms had closed deals in the past 6 months, the number of deals closed – 4.3 on average – is expected to remain the same in the coming 6 months (according to 51 per cent of respondents) or move higher (38 per cent).
Competition for deals appears to be plateauing. More than half of survey respondents (57 per cent) expect the deal market to become more competitive in the next six months than it has been during the past year, though that fraction is significantly smaller than the 67 per cent of respondents who responded similarly six months ago. Of those who predict an increase in competition, 42 per cent said there are too many private equity firms chasing too few quality deals and 49 per cent feel pressure from limited partners to put cash in play.
“The industry has shown tremendous resilience through the pandemic” says Ben Harrison, President of Financial Services at Intapp. “Private equity firms have shown both the strategic clarity and agility to shift priorities, which will help them compete in the new normal.”
Nearing a possible saturation point, the deal market edged further upward. Key findings include:
The firms that reported having closed a deal in the last six months inched up 2 per cent from spring to autumn 2021 (87 per cent to 89 per cent), a much lower rate than the 17 per cent increase in the six-month period between our autumn 2020 and spring 2021 survey. Looking ahead, 75 per cent of the respondents who said their firms had not completed a deal between the spring and autumn surveys do plan to close at least one deal in the coming six months.
Sixty percent of autumn survey respondents plan to prioritise new acquisition activity over roll-ups or working with portfolio companies to improve operations – down from 84 per cent who planned to focus on new deals in spring. In fact, 24 per cent plan to make working with existing portfolio companies their top priority, compared to just 7 per cent in the prior report.
Four in 10 dealmakers (40 per cent) think valuations and pricing will be higher in the coming 6 months than they have been for the past 12 months, though this is down from more than half of respondents who projected higher valuations in spring 2021.
Many bankers (52 per cent) say their firms will take advantage of high pricing/valuations by selling companies earlier than ever before. High prices also draw concerns; 39 per cent of respondents worry about increased or overlooked risk and 36 per cent about the speed of capital to market.
The combined effect of high valuations and competition for deals is pushing 27 per cent of survey respondents to make larger acquisitions than their typical comfort zone.
“Large, midsize, and boutique firms each face different headwinds as they react to the competitive market,” says Harrison. “Large firms are closing more deals and adding sectors to their portfolios — perhaps squeezing into others’ territory; mid-market firms refuse to invest in companies that could hurt their reputation; and boutiques may not feel pressed to change their sector focus but find themselves most likely to feel pressure from LPs to put capital in play.”
Several global trends are also affecting the private equity industry. Talent concerns have shifted significantly, with a growing number of respondents — 41 per cent up from 30 per cent 6 months ago — admitting that recruiting and hiring outside talent has become their greatest talent issue, and 16 per cent of firms focusing on retaining existing talent, compared to just 6 per cent in the spring.
Nearly all respondents (99 per cent) view environmental, social, and corporate governance (ESG) as a factor that has either increased or retained the same level in importance during the previous 6 months, and 48 per cent noted they would decline investments due to ESG concerns.
Harrison says: “This edition of the Dealmaker Pulse Survey Report shows that overall expectations for acquiring new companies, hiring great talent, and achieving higher valuations have dampened a bit, but competition for assets will likely rise for most firms — and many are actively changing investment strategies as a result.”
