GPs exits to pick-up with flood of SPAC money in search of deals: survey

Valuations offered by SPACs and buyers seeking ESG targets will drive PE exits, according to EY report.

As developed economies emerge from the pandemic lockdown, private equity exits will accelerate, fueled by higher deal valuations offered by SPACs and buyers’ willingness to pay an ESG premium, according to EY’s 2021 Global Private Equity Divestment Study.

Among the 106 global PE executives surveyed by EY, half of them will look to exit through public markets in the next 18 to 24 months.

This holds true even as SPAC issuances have dropped considerably, according to Pete Witte, EY global private equity lead analyst. “GPs are taking calls everywhere from SPACs that are looking for potential acquisitions,” Witte said.

Following talks of increased regulations, the SPAC hype started to cool off with only 13 deals announced in April versus 109 in March, according to Dealogic. But a record number of SPACs were issued in Q1 – 300 IPOs totaling $97 billion – that are yet to do deals. Pointing to money in search of target deals, Witte said, “you will see the impact of the drop off in [about] two years.”

Valuations offered by SPACs have powered PE exits in the past. For example, Blackstone-backed benefits service provider Alight merged with investor Bill Foley’s SPAC in a $7.3 billion mega-deal in January this year.

Although valuations have normalized since the highpoint of SPACs, the market remains strong. When a sponsor finds a company, blank check investors reach out to PIPE investors for additional capital for deals. Capital commitments from outside investors along with money raised during the IPO, which sits ringfenced in a trust until acquisition, offer opportunity for higher valuations.

“We’ve looked at the average deal value of SPACs, it was 4.5x of what had been raised,” Witte estimates. “But it’s clear that some of that PIPE investment is less available [now].”

ESG is all the rage

“ESG was a risk management exercise, now it’s sort of a value driver,” Witte said.

PE firms are actively courting potential buyers with a strong ESG record, according to the survey. Regionally 57 percent of Asia-Pacific PE firms indicate they are seeking a buyer with a strong ESG record; 50 percent in the Americas; and 41 percent in EMEA.

Social impact policy, including diversity and equality commitments, is a critical area of ESG focus for 57 percent of PE firms surveyed. “Firms are doing these [D&I] things and buyers are willing to pay more.”

PE firms expect to capture a premium for businesses with ESG factored into it. This means that a PE firms’ growth plan includes bringing in senior professionals at the company, elevating mid-level employees, checking the supply chain to stay in compliance with labor regulations and other diversity measures like workforce representation, Witte said.

By doing so, nearly three-quarters or 72 percent of PE firms surveyed seek to benefit from higher valuations on their assets.

PE exits have jumped to roughly 40 percent or nearly $600 billion during the 12 months ending March 2021, according to Dealogic data. “There are strong tailwinds for firms looking to sell,” Witte said.