Private equity headed for its first trillion-dollar year as fundraising recovers

Private equity’s big players in the current merger boom are not only exiting investments at a fast clip, but also raising new investment in record amounts, according to Peter Witte, private equity lead analyst at EY.

“Fundraising really returned in the second quarter of this year,” Witte said in an interview. “Up until now it simply hasn’t been an area of focus” as funds were deploying capital and dealing with portfolio companies during the pandemic.

The private equity industry raised $350 billion globally in the first half of 2021, up 27 percent from the first half last year, and up 50 percent from the second half of last year when covid most affected fundraising.

“That’s what firms announced for an entire year as recently as four years ago. We’ll likely see PE’s first trillion-dollar year,” he said.

The market has seen over $500 billion in deal value year-to-date, with roughly half in the US, he added. Private equity accounts for about one-third of merger activity in the US.

Speaking at EY’s mid-year mergers and acquisition conference, Witte noted that up until the second quarter of 2021, fundraising had not been a major factor because of the pandemic.

But now with the with the world economy slowly emerging, deals are in full swing. The tailwinds of cheap money, strong equity markets and rush of IPOs provides the funds with opportunities to do deals and make distributions to their limited partners. That distribution money is coming back to the funds in the form of new investment, resulting in bigger funds, and oversubscription.

Private equity firms are literally “turning away money,” Witte said.

The cyclical boom is being augmented by a secular shift of more and more wealthy investors and family offices push for access the private equity asset class. After going through a tough period during the pandemic, capital is now back, and limited partners are more comfortable.

The private equity industry has plenty of dry power, with about $1.5 trillion available for deals. “Funds have learned their lessons from the financial crisis” and are cautiously deploying capital, said Witte.

Also, the secondary market in private equities has sprung to life, growing to $100 billion a year, from $5 billion 12 years ago, when the market was “not a factor during a time of distress,” according to Witte.

Secondaries not only help limited partners balance portfolios, but they also provide general partners with more flexibility. With secondaries, GPs can find new partners to maintain investments rather than by being forced to sell because of some arbitrary prospectus deadline.

As the market emerges from the pandemic, Witte said that PE acquirers are trying to distinguish what consumer trends are permanent and what are temporary before they pay up for companies.

Brian Salsberg, EY global buy and integrate leader, said that he expects little to stop this “Jetson” style merger boom over the next 18 months. Companies during the pandemic held back and used their revolvers, but now they are going out and borrowing long-term at attractive rates of around 3 percent.

Salsberg noted that some deals are being motivated by the anticipation of rising capital gains tax rates.

Outside of the political controversy around big tech, there appears to be little focus on antitrust for other industries, he added. That has emboldened non-tech firms to do deals they would normally have avoided.

Also present is a fear of inflation and rising interest rates, which can be seen in how the NASDAQ’s tech stocks drop whenever the US Federal Reserve talks about raising interest rates, he added.

Panelists agreed that private equity has been fairly disciplined in what they are willing to pay for growth. Where multiples are getting stretched is in the SPAC arena, they noted.