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Private equity sees record $1 trillion year, boosted by rush of COVID-stalled deals

·5 min read

U.S. private equity firms had a banner year of dealmaking.

In 2021, the private equity industry struck deals valued at a whopping $1.2 trillion, topping 2019’s previous record by 64%, according to PitchBook data. At 8,600 deals sealed, the number of transactions logged also eclipsed the all-time high in 2019 by 50% after a modest slowdown in 2020 due to uncertainty around COVID-19.

“Everything that is investible, private equity is figuring out a way to invest in,” Wylie Fernyhough, a senior analyst at PitchBook told Yahoo Finance. “You're seeing a lot of activity in, quite frankly, pretty much every space imaginable.”

Companies closing deals stalled by the pandemic contributed to the unprecedented activity, mostly in the first half of the year as general partners played catch-up with capital they had not deployed in 2020. A flurry of dealmaking in the latter half of the period was spurred by the industry’s anticipation of proposed rate hikes by the Biden administration on capital gains, motivating a wave of sellers aiming to avoid the anticipated increases, per PitchBook’s research.

The overall market and macroeconomic environment in 2021 was also conducive to the robust deal activity recorded during the year, with more institutional allocators lifting their commitments to private funds, notching up the money firms have to spend. With interest rates low, large asset owners such as pensions, foundations and other entities raised their private equity exposures as they sought to take advantage of the asset class for its return characteristics, leaving the sector with more cash than ever to scale quickly and churn out new investment strategies.

“The industry really turned over a new page this year in a way, with a lot of trends that had been growing or had been emerging really kind of coming into their own,” PitchBook senior analyst Rebecca Springer told Yahoo Finance. “The ingredients for that were a perfect storm of economic growth, capital availability, fundraising activity — so tons of dry powder — and really hot public markets providing an exit opportunity that wasn’t available a couple of years ago.”

'No longer just vanilla leveraged buyouts'

Record-setting PE activity resulted in intense competition for deals, leading many firms to vie for compelling assets as their focus shifted to companies with promising industry growth trajectories and attractive business models, PitchBook’s report indicated.

One of those industries was behavioral health, which saw massive private equity interest during the year due to its lofty valuation growth, driven by attractive margins and tailwinds such as Americans’ greater interest and awareness of mental health and higher rates of alcoholism, substance use relapses, and anxiety and depression caused by COVID lockdowns.

Software, which comprises a significant segment of PE tech investments, also made up a large portion of total dealmaking activity, with information technology (IT) specifically topping records in both deal count and value at more than $100 billion for the first time (947 deals at an aggregate of $167.1 billion). The global shift to remote work and digital transformation of industries across the board accelerated activity in the space. Healthcare was also a dominant PE-backed industry, with 733 transactions valued at $77.5 billion.

“One of the biggest takeaways last year was the breadth and depth of deal activity — it’s no longer just vanilla leveraged buyouts of asset-heavy companies anymore,” Fernyhough said. “You have private equity firms focusing on technology and health care, and you have private equity deploying capital into sports teams and music rights.”

Private equity heavyweights KKR and Blackstone were among firms in the industry that swooped up deals on the music side: BMG Rights Management and KKR teamed up to buy catalogs from musicians in early 2021, including ones from One Republic and John Legend. Meanwhile, Blackstone partnered with advisory firm Hipgnosis to plow $1 billion into music rights, including the purchase of eOne Music, owned by Dr. Dre’s Death Row records.

In 2021, exit activity was “proportionally more robust than dealmaking,” galvanized by the red-hot IPO market that saw companies listed at a record rate. As a result, PE- and venture-backed businesses tapped the IPO market “in a way not seen in two decades.” PitchBook’s research stated that with the multiple spread between public and private markets remaining intact, the wave of public listings is expected to continue in 2022.

On the public market front, a trend that is in “the earlier innings,” according to Fernyhough, is more private equity firms electing to go public, which could make merger and acquisition activity even more likely to rise. Just Thursday, private equity giant TPG (TPG) made its public debut on the Nasdaq.

Employees of Private-equity firm TPG, celebrate their company's IPO outside the Nasdaq Market site in Times Square in New York City, U.S., January 13, 2022.  REUTERS/Brendan McDermid
Employees of Private-equity firm TPG, celebrate their company's IPO outside the Nasdaq Market site in Times Square in New York City, U.S., January 13, 2022. REUTERS/Brendan McDermid

“Public alternatives managers will do almost anything to be seen as a growth stock rather than a value play, meaning they must constantly launch new strategies and bring in new people,” PitchBook’s report said. “Being public also affords them a new currency with which to finance M&A and retain talent: public stock.”

The pace of dealmaking activity may slow somewhat in 2022 as the industry runs through the deal pipeline it grew as it lined up transactions in efforts to avoid the previously expected, now off the table, capital gains tax, but with massive levels of PE fundraising, PitchBook analysts were bullish on private equity’s continued momentum in 2022.

“There is definitely a floor under deal making activity that comes from all the fundraising that's happened over the last year and is gonna continue to happen in 2022, so that capital needs to be deployed," Springer said.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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