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