According to the latest report from BDO, private equity and venture capital fund managers are expecting the rest of 2021 to be awash with M&A activity and heavy competition.
The just-published Private Capital Pulse Survey from BDO reports that more than 90% of its survey respondents believe asset prices will increase in the next 6 months and more than half of those expect prices to rise from 10% to 25%, or higher.
“The last two quarters have seen a release of 2020’s pent-up deals coming to market,” said Scott Hendon, the national leader of private equity at BDO. “Coupled with federal economic stimulus efforts and tax policy changes, as well as the impact the pandemic has had on prompting business owners to consider selling, we will continue to see very healthy activity through the end of the year. Quality deals in attractive industries will continue to garner outsized multiples.”
BDO’s survey, which polled 100 private equity and 100 venture capital middle-market fund managers across the United States, reflects a shift in sentiment toward deal-making. More than a quarter (26.5%, up 3% from the Fall 2020 Pulse Survey) said they would direct the most capital toward new deals and investments, while those who said they would direct the most capital toward de-levering portfolio company balance sheets decreased by 6%, from 13.5% to 7.5%.
The pandemic has prompted many owners and founders to consider
accelerating the timing of a sale.
But while private capital is back to sourcing and striking deals, fund managers remain wary of the lingering impacts of the pandemic on business and on the due diligence process, much of which has been conducted remotely. More than half (56%) say risk exposure uncovered during due diligence is the top challenge to closing deals or investing in the current environment, followed by increased competition from other buyers or investors, which saw a 15.5% increase to 48% from 32.5% last fall. Lack of transparency, including access to management teams or complete financial information, takes the third spot (46.5%).
Key Drivers of Deal Flow
Private company sales and capital raises retained the top spot as the key driver of deal flow or investment opportunities in the next six months, and the number two spot went to succession planning, which rose to 48% from 37% – an expected data point as the business impacts of the pandemic have prompted many owners and founders to consider accelerating the timing of a sale.
Investing in distressed businesses saw a slight overall decrease, dropping 2% to 44.5%, while corporate divestitures increased 6.5% to 38.5%. Interestingly, special purpose acquisition company (SPAC) exits came last among key drivers of deal flow, at just 12%.
Taxation of digital products and services is the top tax concern.
Strategic buyers and investors still pose the greatest competitive threat to private equity and venture capital funds (52%), but hedge funds and mutual funds saw the greatest increase on average among competitors, coming in at 51% to take second place, up 12.5% from the fall. Other private equity and venture capital firms as a top competitors surprisingly fell by 8.5% to 36.5%, and SPACs took last place with just 23.5%.
With 91% of fund managers predicting an increase in asset prices, value creation will be pressured. Fund managers said the top post-closing challenge was performance improvement, reducing costs and enhancing revenue, followed by leveraging digital tools for improved reporting and analytics and operational improvements.
What’s Important for Limited Partners
No doubt aided by the events of 2020, environmental, social, and corporate governance (ESG) investing has become a front-and-center priority. Asked how important it is to their limited partners that their investment strategy incorporates ESG criteria, 94% of fund managers (96% private equity, 92% venture capital) indicated it was either “very” or “somewhat” important.
Limited partners’ attitudes toward ESG are reinforced in how fund managers ranked items of importance for their limited partners. More ESG investment options (19%) were ranked just behind harvesting and realizing investment gains (20%) and co-investment opportunities (19.5%); these priorities are driving fund managers to direct the most capital toward new deals and investments.
Other Interesting Survey Findings
- Taxation of digital products and services is the top tax concern: Increased taxation of digital products and services was fund managers’ biggest concern (58.5%), beating out concerns for a potential capital gains tax increase by 8 points.
- The top long-term impacts of COVID-19: Digital capabilities of an acquisition target took first place for venture capital fund managers, while the importance of robust risk management in an acquisition target took first place for private equity fund managers. Higher long-term ongoing valuations for certain industries is another top concern, as well as having a clear and robust supply chain strategy.
BDO’s private equity practice assists private equity funds, portfolios, venture capital, mezzanine, and buyout firms throughout the fund cycle with all aspects of fund services, portfolio management and compliance, transaction advisory services and exit services. BDO is a professional services firm providing assurance, tax, financial advisory and consulting services to both publicly traded and privately held companies.
Click HERE to download a PDF of BDO’s Private Capital Pulse Survey.
© 2021 Private Equity Professional | May 6, 2021
