PitchBook News - What's driving PE's deal frenzy?

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The Research Pitch

June 19, 2021

Looming tax rate hike will keep PE dealmakers busy this year

US PE middle-market dealmaking continued its resurgence in Q1, posting the second-highest quarterly deal value figure on record after Q4 2020.

A significant portion of the deal and exit activity in Q1 still represents buyers and sellers playing catch-up, completing deals that were delayed by the pandemic.

But most of the frenzy is attributable to the resumption of risk-on behavior, easy credit, substantial dry powder stores, and the handsome multiples that sellers can now command.

While some PE firms are shopping in industries that are still awaiting a full recovery, most are on the hunt for high-quality assets with strong growth potential. It's becoming easier to distinguish "COVID effects" from underlying market defensibility and balance sheet quality through careful due diligence.

The rest of 2021 will see this rush of dealmaking continue, driven by the prospect of a capital gains tax rate hike. Although political negotiations are ongoing, its specter has undoubtedly set many sale processes in motion already.

On the exits front, public markets, strategics, and PE buyers were all active. Our performance data shows that middle-market portfolio company valuations may be lagging larger assets in the pandemic bounceback—but they're trending sharply upward as of Q4, the last quarter for which data is available.

Fundraising, too, has found a new normal. Some of the funds that closed in Q1 hit their hard caps through fully virtual processes, and on quick timelines to boot. Many have resumed in-person due diligence.

The quarter saw a wave of emerging managers who had delayed fundraising processes during the pandemic close.

And in an environment where there's no such thing as buying a good company for cheap, sector specialists—who promise a differentiated ability to effect transformational growth—are continuing to enjoy fundraising success:

Read more analysis in our Q1 2021 US PE Middle Market Report

Feel free to reach out to me or our institutional research group with any feedback or questions.

Best,

Rebecca Springer, PhD
Analyst, Private Equity

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Thematic Research

Getting to the Root of IoT/OT Security

All eyes are on information security these days, as headlines persist worldwide around ransomware attacks and other cyberhacks.

And, indeed, security related to the internet of things and operational technology simultaneously represents a growing threat to enterprises and an emerging opportunity for startups and investors, according to analyst Brendan Burke.

IoT/OT security has also become a legislative priority, as the US government passed the IoT Cybersecurity Improvement Act last December.

Key insights and data within our new research note:

Identifying segments of IoT/OT security that are underinvested from a VC perspective relative to the opportunity.

Explaining where limitations exist for IoT-focused platforms in areas like manufacturing, natural resources and transportation.

Market size estimates by segment and use case.

download the free research

Leveraging Technology to Revamp Health Insurance

Tech is coming to (and coming after) health insurance.

In a new segment to our regular health & wellness tech coverage, analyst Kaia Colban probes all aspects of this growing market as startups begin to provide insurance themselves or offer tech solutions to benefit anyone from incumbents to employers to individuals.

What you'll find within our research note:

Featuring all-new market maps, we focus on three key segments: health insurers, insurance operation tech, and marketplaces & benefits management.

Industry drivers include rising costs, the rise of telehealth, and new business models like value-based care.

Data on market sizes and growth rates, along with VC funding metrics on 2021's hot start.

download the free research

Webinars & Events

There are plenty of opportunities to hear from our analysts this upcoming week:

June 22: We're partnering with the BVCA on a series of fireside chats, the first of which will feature our department head, Nizar Tarhuni, and Scott Ramsower from the Teacher Retirement System of Texas. Exclusive to BVCA members.

June 23: At the ACG Virtual Summit, analyst Rebecca Springer will discuss how middle-market PE firms can differentiate themselves in a competitive landscape. Register here.

June 24: Analysts Andrew Akers and Hilary Wiek will discuss how mark-to-market accounting and conservative valuations can produce misleading returns data for private funds. Register here.

Deal Commentary

Mobility tech analyst Asad Hussain weighs in on Waymo's $2.5 billion funding round from an investor group including Silver Lake, Andreessen Horowitz and parent company Alphabet:

"We believe such an aggressive raise suggests Waymo is gearing up to expand its service to additional locations.

"While years of operating sub-scale in a limited suburban location has helped advance Waymo's technology, it has not led to a commercially viable model.

"As a result, we expect the company is preparing to make the jump to a larger city metro, likely San Francisco, where higher ride volume can drive better operating metrics, and where it would come into more direct competition with Cruise.

"We expect the robotaxi industry—led by Waymo and Cruise—to achieve human-like levels of safety by the middle of the current decade, and 'super-human' levels of safety by the end of the decade.

"While it may yet be years before Waymo can scale in a large city, we nonetheless believe this is the core rationale behind seeking such a large funding round."

Asad Hussain

Senior Emerging Tech Analyst
Mobility Tech

In the News

Our insights and data featured in the press:

Following 23andMe's SPAC deal with Richard Branson, analyst Kaia Colban explains why the company represents more of a "long-term" play regarding drug development. [Forbes]

The Wise IPO "could be a major coup for the London Stock Exchange," EMEA private capital analyst Nalin Patel says. [Yahoo Finance UK]

Analyst Paul Condra discusses his latest research, our new Emerging Tech Indicator report, and where the next batch of unicorns are likely to be found. [Real Deals]

Similar to today's top story, analyst Rebecca Springer goes deep into robust activity in the US PE middle market. [Institutional Investor]

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

ICYMI

Highlights from our other research content published this quarter:

Market updates

Emerging Technology Indicator
European VC Valuations Report
Global Fund Performance Report
US VC Valuations Report
UK & Ireland Private Capital Breakdown

Thematic research

Emerging Technology Research (report previews)

Coming next week (subject to change)

Real Assets Report
Enhancing Gut Health Through At-Home Tests and Probiotics
AI M&A Priorities

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

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PitchBook News - What's driving PE's deal frenzy?

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