PitchBook News - PE forges a new normal

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The Research Pitch

April 17, 2021

US PE activity was robust in Q1, suggesting normalization at healthy levels as we enter the post-pandemic period.

After the unprecedented down-and-upswing of 2020, what does this new normal for the industry look like?

GPs sit on a mountain of dry powder and are expecting a blockbuster fundraising year, with several mega-funds closed already and a queue of $10 billion+ vehicles announced.

Despite high multiples, investors are increasingly deploying that capital in growth sectors and strategies. The public markets are playing a greater role in PE exits than they did on the eve of the pandemic, and strategic buyers are reaching into deep pockets.

At the same time, PE firms are mining the wreckage left by the pandemic in certain industries—e.g., brick-and-mortar retail, hospitality—for opportunistic buyouts.

The new normal of 2021 is not without its peculiarities, and we cover it all in the latest edition of our flagship US private equity report.

PE jumped into the SPAC fray in Q1. SPAC sponsorship by the likes of Apollo, KKR and Bain has raised conflict of interest concerns for LPs. On the other hand, upper-middle-market GPs are boasting about the calls they receive from uncommitted SPACs regarding their portfolio companies:

Download our Q1 US PE Breakdown

GPs are also innovating on old playbooks.

My new analyst note examines add-ons, which have grown steadily as a percentage of US PE deals over the past two decades, topping 70% in 2020.

But the buy-and-build is changing.

GPs no longer hold platforms with add-ons longer than portfolio companies without add-ons. They're also developing sophisticated strategies to add value through inorganic growth in high-multiple environments:

Download our analysis of how the PE add-on strategies are evolving

Feel free to email me or our institutional research team with any feedback or questions.

Best,

Rebecca Springer, Ph.D.
PE Analyst

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Market Updates

A year ago, "uncertain" was about the only way to characterize how the US venture industry would respond to the oncoming pandemic.

A year later, that response can be categorized as "extremely well."

Q1 2021 was record breaking, not only in terms of invested capital—more than $68 billion—but also for fundraising, exits and SPACs.

These records have been helped by several factors, including:

high levels of VC dry powder
a strong public market
strong LP interest pushing VC fundraising to nearly $33 billion (more than $19 billion of which was concentrated in 14 funds)

The Q1 PitchBook-NVCA Venture Monitor delves into the trends that have emerged from the past year and looks forward to how the current market dynamics may play out.

The report also features data breakdowns by emerging sectors and technologies, explores how female-founded companies fared during the record quarter, and dips into venture debt, a market segment that has seen marked growth over the past few years:

read the report

Webinars & Events

Don't miss the replays of this week's webinar (SPACs and electric vehicles) and podcast episode (VC trends to watch in 2021).

Save the date for these upcoming engagements:

April 20: Analysts Rebecca Springer and Wylie Fernyhough join a discussion on Bay Area M&A. Learn more.

April 22: Analyst Alex Frederick helps unpack the size, diversity and momentum of the "sustainability tech" space. Details here.

April 28: We're hosting a webinar exploring the opportunities and challenges in the world of autonomous finance. Register here.

April 28: Analysts Hilary Wiek and Dylan Cox will discuss European private capital trends including fundraising, performance and private credit. Learn more.

Deal Commentary

Mobility tech analyst Asad Hussain weighs in on Grab's record-breaking SPAC merger:

"The buzz around Grab represents a turnaround in investor sentiment toward mobility companies.

"When Uber and Lyft listed in 2019, they faced intense scrutiny over low margins and unclear paths to profitability. The environment today for mobility companies couldn't be more different.

"The market's positive reaction to the Grab merger signals strong investor enthusiasm for transportation technology and the future of mobility.

"In our view, the health crisis has opened many investors' eyes to the vast, long-term market opportunity of mobility technology, and the pressing need to improve existing transportation systems.

"We expect continued growth and investor enthusiasm for the sector, even as COVID restrictions are lifted and more consumer businesses are able to open.

"It's fitting that the largest SPAC merger in history involves a mobility company, as the EV/mobility industry has brought SPACs into the global spotlight.

"We also expect Grab’s listing will set the stage for more mobility services companies to go public through SPACs. Potential future SPAC candidates could include ridesharing companies Gett and Bolt, carsharing companies Turo and Getaround, and micromobility companies Bird, Lime and Revel.

"We expect high-profile mobility SPACs will draw additional venture capital to early-stage mobility startups, now that a clearer path to exit has been established.”

Asad Hussain

Senior Emerging Tech Analyst
Mobility Tech

Fintech analyst Robert Le comments on Coinbase's listing as both the crypto and DeFi markets continue to attract attention:

"Coinbase’s direct listing is the first major crypto pure-play to publicly list and will likely be a bellwether for other crypto companies to enter the public markets.

"Coinbase has experienced strong user and revenue growth over the past 12 months and will be one of the few tech companies to show profits at market debut.

"Because of this, investors have rewarded the company with a very high valuation. However, we believe Coinbase will be hard-pressed to maintain its growth path as many competitors such as established incumbents like PayPal and Square or crypto startups like Binance and Kraken seek to attract Coinbase's customers by lowering transaction fees.

"This places margins under significant downward pressure from not only diminishing revenues but also mounting costs including sales and marketing (5% of net revenue in 2020 to 12-15% in 2021) and transaction expenses (11% of net revenue in 2020 to 13-17% in 2021).

"Furthermore, Coinbase's transaction fees are concentrated around the trading of Bitcoin and Ethereum, which places the bulk of its revenues at the whims of those asset prices.

"We do believe that the company is well-positioned to offset competitive and concentration risks by continuing to diversify its institutional business, which includes prime brokerage and custodial services.”

Robert Le

Senior Emerging Technology Analyst
Fintech

In the News

Our insights and data featured in the press:

As remote work environments have adjusted traditional venture behavior, analyst Kyle Stanford comments on what recent deal activity means for future regional VC. [Wired]

Mobility tech analyst Asad Hussain offers his outlook for the electric vertical take-off and landing (eVTOL) space. [eVTOL.com]

Asad Hussain also provided his take on the capital constraints and consolidation he expects to see in the autonomous vehicle space. [Bloomberg]

While SPAC transactions continue to roar, real conflicts of interests can arise in these processes. Analyst Wylie Fernyhough explains the conflicts present for PE sponsors. [Institutional Investor]

If you're a media member interested in interviewing our analysts, contact our PR team.

ICYMI

Highlights from our research content published over the past few months:

Market updates

Thematic research

Emerging Technology Research deep dives

Coming next week (subject to change)

Q1 European PE Breakdown
Analyzing the impact of crossover investors
Digging into sustainable food supply chains

Thanks for reading! Feel free to email us any time with feedback, questions or tips!

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PitchBook News - PE forges a new normal

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