How is private equity faring in the post-2020 aftermath of covid-19? The new global private equity deal report from Bain & Co., which consults and advises private equity investors, says private market investment recovered sharply from the second-quarter onset of covid-19 in the third and fourth quarters of 2020. Globally, private equity firms generated $592 billion in buyout deal value in 2020, up 8 percent jump from 2019’s performance and 7 percent higher than the five-year average of $555 billion. Most of that amount–$410 billion–emerged in the third and fourth quarters as private equity general partners (GPs) quickly put money back to work. As a result, Bain & Co says, the second half of 2020 “ended up being as strong as any two-quarter run in recent memory.”
“Private equity held up well in a most unprecedented and tumultuous context,” said Hugh MacArthur, global head of Bain & Company’s Private Equity practice, commenting on the firm’s findings in its newly released Global Private Equity report. “The market absorbed the drop seen in the second quarter, and ended up on a high overall, as dealmakers quickly adapted to working in a remote world. With the number of deals down in 2020 from recent levels, we expect to see a lot of pent-up demand returning to the market.”
Per Bain & Co, deal volume was somewhat lighter in 2020–down 24 percent–from the previous year. But rather declining, Bain says, volume appears to have been only deferred, contributing to pent-demand that looks likely to impact deal numbers positively in 2021. Bain & Co.’s data for 2021 year-to-date through February, shows global buyout deal value is already 60 percent higher than the average of the first two months for the past five years.
Dry powder
However, Bain & Co. cautions, one potential downside of all this robust private equity interest is swelling valuation multiples. Inflated asset prices in sectors that were either less impacted (or directly benefited) from covid, such as technology, have put multiples at or near record highs. One key factor for this is the very large accumulation of private equity dry powder–capital raised but not (yet) spent–which is also at record levels. Total dry powder, including that committed to venture, growth and infrastructure funds, has swelled since 2013 to almost $3 trillion, around one-third of which, Bain & Co. notes, is attributed to buyout funds and SPACs.
Despite this, the firm notes, there is “little evidence to suggest that buyout funds are under undue pressure to put money to work.” The average age of buyout capital remains under control, and the amount in reserve equates to around two years’ worth of investment, far less than in the years following the global financial crisis.
“Dry powder is an issue but not a cause for alarm,” say Bain’s analysts.
The skinny on SPACs
One of the major thematic stories of 2020 was the runaway popularity of special-purpose acquisition companies (SPACs), which raised $83 billion in fresh capital, more than six times the previous record set just a year earlier. While this trend looks set to continue in 2021, Bain & Company says SPAC returns are improving overall, but individual performance remains “highly variable.”
The momentum carried over into 2021, with more than 170 SPACs raising over $50 billion through February alone.
According to Bain & Company, SPACs could play a meaningful long-term role in the capital markets as companies seek alternatives to traditional IPOs. But, the firm says, SPAC structures are likely to evolve, giving SPAC sponsors more exposure to long-term company performance, both through the initial at-risk capital and forward purchase agreements. This, in turn, will put pressure on sponsors to focus on more than just closing a deal and moving on, an attitude that Bain & Co. observes, has plagued some SPAC deals in the past.
“In the current environment, any likely target with a public-company profile has SPAC sponsors lining up at the door,” said Brian Kmet, a partner at Bain & Company. “Winning players looking for long-term, repeatable success will have to balance their effort across three equally important jobs: finding the right deal in time; strengthening due diligence capabilities to analyze and vet their highest-potential targets; and boosting performance through management expertise, talent networks and world-class value-creation planning.”
