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Ringing Up New Private Equity Deals

Adnan Zai

For all the twists and turns of the last two years, one sector of the economy has certainly landed on their feet after a rough time early in the pandemic spring of 2020: the private equity realm. After a clearly delineated 2020, with the first half of the year decimated by the pandemic, the second half of the year skyrocketed as far as private equity deals were concerned. The momentum gained speed and the private equity sphere has carried through 2021, with no end in sight to the plethora of deals or the companies ready to purchase other companies, debt and all. As the pandemic goes, the country has learned to expect the unexpected.

The Gains

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.”

Because the interest rates are so low, investors see this as a great opportunity to purchase large conglomerates for a fraction of the usual cost. And with a variety of businesses inexplicably flourishing throughout the pandemic, there are a variety of companies from which investors can choose.

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. “The more PE firms take over companies, the more they grow, the more cash they can extract from their investments, the more opportunities they can take.”

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.

For instance, H&F, Blackstone Inc. and Carlyle struck a $30 billion-plus deal in June for Medline Industries Inc., a medical-supply company, and this was the largest buyout since the 2007-08 financial crisis occurred.

The Reasons

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.

“There is a huge difference in the level of stability of these businesses, the level of interest rates and the depth of the industry’s resources,” said John Connaughton, co-managing partner at Bain. Companies making a move spend a lot of time and money studying the ramifications of a deal before they make their move.

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.

The Future

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 a 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 pandemic raging for the second year in a row, the world needs some glimmers of hope. For private equity companies, the hope has come in terms of billion dollar deals that continue to be made, which are life giving to both the buyers and the sellers. With any luck, these lucrative deals will continue long into the new year.

Adnan Zai

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