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Private equity deals insights: 2021 midyear outlook

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Significant market tailwinds triggered by historically low interest rates in private equity

The momentum from late 2020 is expected to continue through 2021 for private equity (PE) firms. The first five months in 2021 saw PE deal volume increase 21.9% compared with the same period last year, resulting in 2,346 deals.

Private equity firms are benefiting from significant market tailwinds triggered by historically low interest rates as well as record fundraising, which is at an all-time high with US PE dry powder at $150.1 billion. Additionally, we are seeing an increase in new funds being set up by experienced PE professionals from already established funds, resulting in high levels of deployable capital.

PE deals outlook

With competition for traditional PE deals increasing and putting pressure on returns, PE firms are evolving to be diversified alternative asset managers with holdings in a variety of asset classes. From 2015-2019, for example, the five largest US alternative investment players on average drove annual net new money (NNM) flows at between 5% and 15% of assets under management (AUM), while traditional active asset managers saw negative flows.

For example, in the hunt for net new money, insurance companies have become one of the more interesting targets for PE since many insurance products (such as annuities, life insurance and long-term care insurance) represent stable long-dated liabilities that need to be backed by pools of long-duration assets. This dynamic is heating up now because of two major drivers. First, private equity managers can generate higher risk-adjusted returns on assets, helping insurers generate additional spread and higher return on equity. 

Second,  they increase AUM, generate additional fee income and provide a source of permanent capital through access to the insurance company’s balance sheet.

We also expect tax law uncertainty to spur more deal activity as PE funds and founders look to lock in gains prior to any increases in capital gains taxes. Given the rising multiples being paid for assets, value creation — and more broadly the growth agenda for portfolio companies — is increasingly becoming a focus for PE funds.

We anticipate environmental, social and governance (ESG) considerations to become an integral part of a sustainable value creation strategy for portfolio companies from the screening phase of dealmaking through the exit of an investment. As such, we expect PE firms to do a more thorough analysis of the ESG risks across their portfolio and to become more selective of their targets.

“The heightened focus on ESG is disrupting the way private equity firms are approaching deals and creating value in the portfolio.”

- Manoj Mahenthiran, Private Equity Deals Partner

Key deal drivers


The emergence of special purpose acquisition companies (SPACs) in recent times has posed an interesting challenge for PE firms to match or beat SPAC valuations. Recent regulatory scrutiny has tempered hype around SPACs as a source of capital and has made them potentially less lucrative as an exit for PE-held organizations in some cases. This could drive longer holding periods, and PEs exploring more traditional exits such as IPOs in the long-term.

This activity has in turn created recent opportunities for PE as a channel for capital. We expect low interest rates and abundant capital to continue to spur PE activity (lower debt financing costs) and tax law uncertainty to spur exit activity to accelerate timing and avoid potentially unfavorable tax outcomes in the future.

Commitment to purpose and talent

ESG issues are a business imperative that can affect long-term success and value creation. From green initiatives to diversity in leadership and commitment to equity, justice and other societal issues, companies are more accountable to shareholders, customers and employees than ever. PE firms are assessing the workforce, composition of the management team and board of directors, the overall brand promise and other factors when considering a company’s valuation and the potential returns on a deal. 

As the focus on ESG increases, we expect PE firms to do a more thorough analysis of the ESG risks across their portfolio and to become more selective of their targets. According to PwC’s recent Global Private Equity Responsible Investment Survey 2021, 72% of respondents indicated that ESG risks and opportunities are a consideration at the pre-acquisition stage, and 37% indicated that they have turned down an investment opportunity because of ESG concerns.

In the near term, we anticipate PEs to identify an anchor focus across ESG as a part of the diligence process, and to work with their portfolios to measure compliance. Based on recent activity, a focus on sustainability and net zero are emerging as a priority for PE firms. According to PwC’s survey, 36% of respondents consider climate risk at the due diligence stage to understand and mitigate the exposure of portfolios. Longer term, the direction of travel is clearly toward business transformation to mitigate ESG risks and open new value creation pathways.

Subsequently, we expect PEs are likely to adopt a more formal ESG policy for their investments by standardizing ESG diligence during pre-acquisition and ensuring that the investment teams receive formal training on applicable topics. We anticipate ESG becoming an integral part of a sustainable value creation strategy for portfolio companies from the screening phase of dealmaking through the exit of an investment.  

Value creation

PE firms' historical role of acquiring assets at a bargain and selling off in pieces in the right market conditions is rapidly evolving. PEs are increasingly viewing their role as that of a change agent. Consequently, we are seeing fewer deals based only on the traditional playbook — and an increasing focus on identifying opportunities through value creation. This trend is bolstered by the large amounts of undeployed capital enabling PE firms to take on the potential risk associated with these initiatives.

PE’s role as change agent is driving a few dominant trends. Firstly, PEs are increasingly comfortable with their ability to execute on strategic initiatives, which in turn is driving valuations. The historical approach of valuing a business based on free cash flow has evolved to where a PE is also valuing businesses based on its potential post value creation efficiencies/upside. PEs realize that a strong value creation plan is required to justify aggressive valuations, which in turn puts a tremendous amount of emphasis around value creation for PE firms. Secondly, portfolio companies are increasingly viewing PEs as a strategic partner to help them achieve their growth aspirations.

We are also witnessing an emergence of transformative value creation levers being considered by PE firms. We’ve seen PE firms and their underlying companies succeed with value creation programs when they include strategic sourcing plans, integrated tax planning and a model for working capital success. PE firms are also looking at the potential of workflow automation, cloud transformation, digitization, etc., for driving value in their portfolio.

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Manoj Mahenthiran

Private Equity Lead, PwC US

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