For two years, the pandemic has upended life as we know it, but there is one part of the economy that has come out ahead. The private equity realm rebounded from a miserable first half of 2020, and with the ball rolling in a positive direction, they have never looked back. Private equity deals are crushing previous deals and it looks as though the good fortune will continue into the new year.
Private Equity Profits
A prolific gain in private equity deals seems counterintuitive in a global pandemic. Although other parts of the economy have faltered in the pandemic world, private equity deals continue to burgeon. According to the Wall Street Journal, “Private-equity firms have announced a record $944.4 billion worth of deals in the U.S. so far this year, including buyouts and exits, according to Dealogic. That is 2.5 times the volume in the same period last year and more than double that of the previous peak in 2007.”
The success of the private equity market is a self-fulfilling prophecy now. The high action and volume in private equity is such that it just keeps creating more action. “Lots of funding and investment opportunities have created a real boom in private equity,” said Meziane Lasfer, a professor of finance and researcher on private equity at Bayes Business School in London.
An interesting piece of the puzzle is that companies are working together to broker these deals. Week after week, huge deals are signed, often with more than one buyer. A few weeks ago, Bain Capital and Hellman & Friedman LLC purchased healthcare-technology company Athenahealth Inc. for $17 billion, including debt. Several weeks before that deal went live, Advent International Corp. and Permira penned an $11.8 billion deal for cybersecurity-software firm McAfee Corp. The pandemic has pushed the envelope on how companies create their deals and what types of companies are acquired, with a focus on medical and technology companies for obvious reasons.
Riding the Tech and Medical Wave
Why is this such a lucrative time for private equity and what kinds of companies are making the cut? There are several answers to this question. “Driving the urge to go big are the billions of dollars flowing into private-equity coffers as institutions such as pension funds seek higher returns in an era of low interest rates. Buyout firms have raised $314.8 billion in capital to invest in North America so far in 2021, pushing available cash earmarked for the region to a record $755.6 billion, according to data from Preqin.”
Investors are choosing private equity for a variety of reasons. “The private equity market is generally more leveraged than the public market on a relative basis but with better matched return and duration,” said Scott Graves, co-head of private equity at Ares Management.
The pandemic itself has driven the choice for investors as to what types of companies would make for a great sale. Clearly, the pandemic has caused an increase in the use of technology, so investors see this sector of the market continuing to grow, and something worthy of their time and money. With many schools learning online, more companies automating because of the worker shortage, and offices needing more technology as they shift to working at home, investors are jumping on the bandwagon.
Bain and other companies are setting their sights on healthcare and technology, which are growing exponentially because of the pandemic and its ramifications. This makes sense as vaccines and Covid-19 antidotes continue to roll out, and the quarantines caused by the pandemic continue to cause more technology usage.
Will Boon Continue?
The future seems bright for private equity deals, but companies are trying to get in on the action sooner rather than later. “We are certainly seeing some inflationary pressures combined with somewhat of an easing of the pandemic globally,” said Brian Bernasek, co-head of U.S. buyout and growth at Carlyle. “We expect to see a continued robust environment, but with perhaps a bit less steam in the system.”
The low interest rates are certainly some help at the moment, but how long will they last? With inflation creeping up and the Federal Reserve debating a change to the current interest rates, the ongoing magic of the private equity deals could falter a bit in 2022. Firms are also keeping a watchful eye on tax codes and any changes in antitrust laws, to make sure that their deals are still favorable.
With the last year as any indication, the success of private equity seems to have a good chance of continuing in the new year. And frankly, the world needs something to go right as far as the economy is concerned, even if it is riding the coattails of the pandemic to make a profit.
I like to spend my time giving back with organizations that focus on mentoring aspiring entrepreneurs. I have supported after school programs that focus on entrepreneurial and global initiatives in local primary schools. I recently extended my mentoring to include students at Case Western Reserve University.