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Private equity industry runs hot as pent-up demand is unleashed

Global law firm Dechert has published its annual Global Private Equity Outlook report in association with Mergermarket, a leading provider of M&A data and intelligence.

The benchmark report, which examines how private equity (PE) firms continue to successfully navigate their way out of the pandemic, has found that the unprecedented deal activity within the sector shows no signs of letting up, with the industry on course to far exceed past previous records.

Between January and September 2021 alone there has been USD1.17 trillion worth of deals recorded, already eclipsing every prior full-year total stretching back to 2015. In other words, the annual PE deal value is on course to more than double year-on-year as the industry heads into 2022, with capital still pouring in. Global PE and venture capital dry powder hit a record level of nearly USD2 trillion in 2020.

“Record deal volumes, historically low interest rates and huge amounts of dry powder is a combination for explosive alternative asset industry growth, which is expected to continue for several years, and with our complementary practices, Dechert is well-positioned to take advantage of these extraordinary growth opportunities. Additionally, the areas with the most growth, TMT and pharma/medical/biotech are, together with financial services, another growth area, among the sectors in which Dechert’s PE team has been most active in deal making,” says Dr Markus P Bolsinger, co-head of Dechert’s global private equity practice and partner in the firm’s New York and Munich offices.

Underpinning these findings is a global survey carried out by Mergermarket on behalf of Dechert, comprising 100 senior-level executives within private equity (PE) firms based in North America (45 per cent), EMEA (35 per cent), and Asia-Pacific (20 per cent) during the second and third quarter of 2021.

The report also raises an important point that the PE industry should not become complacent, with the previous deal record of USD821 billion set in 2007, immediately before the financial crisis ended the credit boom of that period. Potential future headwinds identified, such as the spread of the Covid-19 Delta variant, Covid-19 induced supply chain disruptions, labour shortages and persistent inflationary trends, could emerge to disrupt the industry’s growth trajectory. Despite these concerns, 41 per cent of North American respondents expect market conditions for PE exits over the coming 12 months to be very favourable.

A consistent investment theme highlighted in the report is ESG with 29 per cent of respondents singling out climate change as the most important ESG consideration taken into account when contemplating investing, with the second most selected consideration being sustainability (14 per cent). This is understandable given the run-up to COP26 and can be taken as the impact of the US market having caught up with Europe on ESG engagement. This development was reflected by 60 per cent of North American respondents and 49 per cent of EMEA respondents expecting a significant increase in Limited Partner (LP) scrutiny of ESG issues and reporting in deals over the next three years. Meanwhile, in APAC just 20 per cent of respondents say the same.

Siew Kam Boon, a private equity Partner in Dechert’s Singapore office, says: “One of the traditional attractions for the APAC region used to be its low-cost manufacturing base and less stringent environmental regulations. With the increased focus on ESG and sustainability (including modern slavery laws), private equity firms might consider targets less weighted by these and other ESG issues. Instead, because of APAC’s vast potential for globally significant climate and ecological impact, we expect to see much more private equity investment in renewable energy, high-quality natural capital, and corporations that use technology to reduce carbon emissions in the region,” says Boon.

Looking ahead, the report recognises a divergence beginning to emerge within the industry between large well-established players, including multi-strategy asset managers, and smaller, mono-line or less well established market participants, making it increasingly harder for new entrants to establish themselves in the market. The sheer size of transactions is also witnessing a revival of club deals in the US, birthplace of the PE megadeal, with 53 per cent of North American General Partners (GPs) anticipating the increasing prevalence of club deals in the pandemic’s wake, compared to 37 per cent in EMEA and 30 per cent in APAC.

Interestingly, almost half (45 per cent) of respondents surveyed say they have increased their use of private credit financing in buyouts over the last three years, a noticeable jump from Dechert’s previous annual global PE report, when 35 per cent of respondents reported the same.

The report also identifies the rising phenomenon of GPs selling assets to “continuation funds”, which are also managed by themselves, allowing investors to maintain exposure to particular assets. This was especially evident in EMEA with more than half (54 per cent) of respondents saying they expect one of the aftereffects of the pandemic to be trading successful portfolio companies to successor funds which typically happens through a GP-led secondary transaction.

Christopher Field, co-head of Dechert’s global private equity practice based in the firm’s London office, said: “GP-led secondaries have been a major feature of the European and US markets over the last 18 months since COVID-19. It’s yet another example of PE coming up with creative solutions to the challenges it has faced and, in the process, increasing the volume of capital it is able to attract to invest in these sorts of deals. What is clear from the report is that thinking creatively and using diversity of approach is paramount if firms are to stay ahead in the current market.”

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