Despite a more expansive rebound in private equity exits than expected, there’s no indication of a slowdown in activity or retreat in valuations, Pete Witte, EY global private equity lead analyst, told PE Hub in an interview.
The first quarter of 2021 marked the best quarter for PE deals in over a decade, according to the recent report by Ernst & Young.
“Even in the last few weeks, things have accelerated so quickly that it’s been a strong tailwind for the exit market,” he added.
Private equity deal activity in the past quarter totaled $261 billion, the highest value of transactions in any quarter since Q2 2007 and more than double Q1 2020, according to EY’s quarterly PE Pulse insights. Overall, PE M&A resulted in 617 transactions in Q1 2021.
However, sellers are approaching exits a little differently than they were 12 months ago, the analyst said.
“The amount of faith they [sellers] are trying to provide and give potential buyers some comfort around the business performance – across a range of scenarios – is much greater,” Witte said.
The pandemic has also led to a “reordering of the pipeline” in the past quarter, Witte said. Meaning, companies for sale in certain sub-sectors in March of last year are not the same assets in the front of the line this year.
Valuations & exits
Valuations remained high for most deals despite the global pandemic, and Witte sees no reversal of this trend.
In 2020, LBO valuations exceeded 11x EBITDA, according to S&P LCD, and Pitchbook expects that about one-fifth of deals this year will have multiples in excess of 20x earnings.
“I’d be surprised if valuations came down,” Witte said. “The pandemic really didn’t move the needle on valuations. Now you have SPACs that are in the mixture as well that are also competing for PE deal flow, so it all makes the atmosphere a little more volatile, and, for PE firms, it’s a little harder to find compelling assets and pay good prices for them.”
Tech, a resilient subsector through the pandemic, has seen more premium pricing for high-quality assets amid the market uncertainties.
The technology sector accounted for 26 percent of global deal activity and 34 percent of US deal activity in the last 12 months, EY reported. Overall, tech investments have made up nearly a quarter (23 percent) of PE activity by value over the last 12 months. In the US, the sector has accounted for 34 percent of PE deals by value.
“I think the pandemic really accelerated some of the tech trends,” Witte said. “Some private equity firms are looking for opportunities that are poised to do well in the post–pandemic world, but more broadly is this sense that companies are entering the period with strong economic tailwinds and are going to be willing to spend on tech in a way that they weren’t before,” he said.
The most active areas have been enterprise software, cybersecurity, and analytics, Witte said.
Other popular sectors such as financials and healthcare have also seen strong growth. In the financial sector, for instance, such growth may have been driven by acceleration in the life insurance sub-sector. EY notes that life insurance providers grew more than eightfold over the last 12 months versus a year ago.
With roughly $700 billion to $800 billion in SPAC mergers expected over the next two years, “there seem to be few headwinds that might moderate elevated pricing,” Witte further warned in the report. EY’s expectations on future SPAC values is based upon the around $160 billion to $170 billion raised in trust.
“The amount of capital that’s been raised in SPACs is just tremendous,” Witte said. “That’s on top all the PE activity that’s already happening.”
In Q1 2021, SPACs raised $97 billion in IPO proceeds across nearly 300 IPOs, already exceeding the amount raised during the entire year in 2020, according to EY.
Overall, SPACs backed by PE firms have raised $25 billion over the last 12 months, with most PE-backed SPACs focused on investing in technology, consumer products, retail, power and utilities, and healthcare.
In the first quarter of 2021, SPACs represented buyers for 19 percent of PE exit deals by value, according to the report.
“It’s a lot of capital for private markets to digest in a fairly short period of time. PE firms have to be very mindful in making sure that they are the right owner for the asset and in making sure that they have internal capabilities and confidence that they can create value.”