PE industry runs hot as pent-up demand is unleashed

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Dechert LLP / Mergermarket Report finds record US$1.17tn worth of deals recorded during January – September 2021, eclipsing every prior full-year total back to 2015:

– APAC PE deals more than doubled in value in Q1-Q3 2021 compared with the same period last year.

– TMT remains leading sector followed by healthcare and consumer.

– While Europe and US continue to lead on the ESG front, 65% of APAC participants expect LP scrutiny of ESG issues and reporting to increase over the next three years.

HONG KONG and SINGAPORE, Nov. 10, 2021 /PRNewswire/ — Global law firm Dechert LLP published its annual Global Private Equity Outlook Report in association with Mergermarket, a leading provider of M&A data and intelligence.

The Report, which examines how private equity (PE) firms continue to successfully navigate their way out of the pandemic, has found that the unprecedented deal activity is not letting up, with the industry set to far exceed past previous records.

Between January – September 2021, there was US$1.17tn worth of deals recorded, eclipsing every prior full-year total since 2015. Annual PE deal value is expected to more than double year-on-year heading into 2022.

ESG remains key
A consistent investment theme is ESG with 29% of respondents noting climate change as the most important ESG consideration when contemplating investing, with sustainability as the second most-selected consideration (14%). This is understandable given the run-up to COP26 and can be taken as the impact of the US market having caught up with Europe on ESG engagement. This development was reflected by 49% of EMEA respondents expecting a significant increase in Limited Partner (LP) scrutiny of ESG issues and reporting in deals over the next three years. Meanwhile, in APAC just 20% of respondents say the same.

Siew Kam Boon, a private equity Partner in Dechert’s Singapore office, commented: "One of the traditional attractions for the APAC region used to be its low-cost manufacturing base and less stringent environmental regulations. With the increased focus on ESG and sustainability (including modern slavery laws), private equity firms might consider targets less weighted by these and other ESG issues. We expect to see much more private equity investment in renewable energy, high-quality natural capital, and corporations that use technology to reduce carbon emissions in the region."

Technology driving demand
Technology has significantly contributed to deal flow and valuations in the last year. Not only has technology pushed multiples higher in what is an already extremely high-price environment, but the Report also highlights that bargains are few and far between. In APAC specifically, the TMT sector has been a particularly bright spot, claiming 43% of all APAC deal value in Q1-Q3 2021.

SPACs on the rise  
Technology also has the potential to figure highly in APAC exit activity through Special purpose acquisition companies (SPACs). SPACs are still in their infancy in APAC as compared to the U.S., but fuelled by investor demand and a desire to attract more high-profile tech listings, the Singapore stock exchange introduced a SPAC listing framework and the Hong Kong stock exchange is currently following closely in pursuit of the same.

Siew Kam Boon added: "SPAC mergers are a very viable exit option because listings have always been very difficult for companies in the region. Those who are unable to achieve secondary exits or who can’t do listings are seriously considering de-SPACs as an alternative."

Divergence emerges

Looking ahead, the Report recognises a divergence between large well-established players and smaller, mono-line or less well-established market participants, making it harder for new entrants to establish themselves. The sheer size of transactions is also witnessing a revival of club deals in the US, with 53% of North American General Partners (GPs) anticipating the increasing prevalence of club deals in the pandemic’s wake, compared to 37% in EMEA and 30% in APAC.

Creativity sparks as the industry looks into the future

In order to stay ahead of the curve, respondents across regions say that their firms are creatively sourcing deals (60-74%), locking in a good deal early (63-80%), allocating a separate, dedicated pool of capital for opportunistic deals (60-70%), and/or investing in structured equity transactions, including minority investments (51-75%). Notably, "locking in a good deal early and negotiating rights to double down" appear to be the most popular strategy in APAC, chosen by 80% of the surveyed respondents in the region.

Interestingly, almost half (45%) of respondents surveyed say they have increased their use of private credit financing in buyouts over the last three years, a noticeable jump from Dechert’s previous PE Report, when 35% of respondents reported the same.

The Report is comprised of 100 senior-level executives surveyed at PE firms in North America (45%), EMEA (35%), and Asia-Pacific (20%) second and third quarter of 2021.

The Global Private Equity Report is published yearly by Dechert LLP and Mergermarket. Founded more than 35 years ago, Dechert’s Global Private Equity practice advised on some of the first fund formations and buyout transactions. 

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About Dechert’s Global Private Equity Practice
Dechert is a leading global law firm with 22 offices around the world. Our global team advises private equity, private credit and other alternative asset managers on flexible solutions at every phase of the investment life cycle. We form funds structured for market terms and tax efficiency; negotiate investments and advise on transactions and financings that maximize value; and structure and execute exits accomplished at the right time and delivering the best returns.

About Mergermarket
Mergermarket is a business development and market intelligence tool designed specifically for the M&A sector and provides proprietary intelligence and analysis on corporate strategy across the world.  Visit www.mergermarket.com to learn more.

 

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