After bouncing back strong in the second half of 2020, private equity had a record-setting year in 2021, with some $2.3 trillion in dry powder and about $1.2 trillion in mergers and acquisitions transaction volume by year’s end, an increase of 111% over the previous year. With private equity recruiting continuing to grow and a robust supply of capital among prominent firms, dealmakers in 2022 are poised to continue this growth.
There are changes on the horizon, too, however. The Federal Reserve approved an interest rate increase on March 16, the first since December 2018. Proposed tax reforms and other regulatory shifts are also likely to have significant implications for private equity firms moving forward, something dealmakers will need to keep an eye on in the coming months, while high inflation and rising employee expenses could slow down the sector’s growth. Here are some of the other trends impacting the current private equity landscape.
Continued Rise of Direct Lenders
High-yield debt markets were a major driver of private equity activity in 2021, and direct lenders have been an increasingly important part of this picture, especially in regards to financing LBOs. This segment of the private debt market has been growing since the start of 2009, when many U.S. and European banks scaled back their middle-market lending, opening up new investment opportunities.
Direct lending has accounted for an increasing proportion of fundraising capital over the past decade, growing from $1.7 billion in 2009 to $37.9 billion in 2015, and has continued to hold a steady share of the market since. Direct loans in Europe accounted for 549 deals in the first 9 months of 2021. Since direct lenders aren’t as exposed to market volatility, private equity funds will likely continue to strengthen their relationships with these capital sources as long as global markets remain unstable.
Club Deals Are Making a Resurgence
More than 40% of U.S. buyouts in 2004 were club deals, with two or more firms banding together to buy a company. That practice fell out of favor after the 2008 financial crisis but made a comeback in 2021, with 7 of the largest global private equity firms teaming up for the $34 billion acquisition of Medline, the largest consortium buy-out since 2008. This massive buy overshadowed the smaller but still significant acquisition of McAfee for $14 billion by a group of investors led by Advent International Corporation and Permira Advisers.
This kind of cooperation may seem counterintuitive given the large current volume of available capital. The main advantage of club deals is they allow firms to target larger buys requiring a significant capital investment at signing. The recent $9 billion bid to purchase the Kohl’s department store chain by Wall Street consortium Starboard Value Group shows the Medline acquisition wasn’t an anomaly but the start of a broader trend embracing the club deal as an option moving forward.
Tech Transactions Reach Record Volume
The start of 2022 has been disappointing for tech investors, with the Nasdaq dropping nearly 7% in January and once-reliable buys like Facebook taking major hits. In the broader picture, however, this is a mere bump in the road. Despite their last-quarter losses, private equity firms invested more than $400 billion in tech deals in the U.S. alone in 2021, more than double the $196 billion invested in 2020. Among this figure were big-ticket deals, like the McAfee acquisition mentioned above and the $10.1 billion acquisition of Proofpoint, a cybersecurity firm. This tech investing trend has continued into 2022, with workspace software company Citrix announcing in January that they’d been acquired by Vista Equity Partners and Evergreen Coast Capital Corporation, who plan to combine the company with the data management firm TIBCO.
Despite the market volatility, tech companies remain a smart investment for private equity buyers. The ongoing digital transformation has led to a sharp rise in companies using remote and hybrid work models, and a corresponding increase in demand for virtual workspaces, data security, and other tools and software to support this shift.
Private Equity in 2022 And Beyond
There’s still a lot of uncertainty in the private equity outlook. In the U.S., the status of the Build Back Better Act (and its included changes to taxes and the capital gains rate) is still up in the air. Meanwhile, in Europe, February and early March saw a number of companies canceling planned IPOs, with $634 million worth of deals withdrawn by European businesses in February as the world waits to see the long-term consequences of Russia’s invasion of Ukraine. Private equity leaders will need to keep a close eye on these evolving situations, and their impact on industry trends, as they plan their moves in the coming months.