2022 Private Equity Deal Trends

Published: Feb 21, 2022
By: Phil Bergamo
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2021 was an unprecedented year for deals in private equity. Despite the ongoing impact of the pandemic, onset of inflation, and potential changes in the financing markets and tax rules, deal activity smashed records. Take a look at the following 2021 statistics, according to PitchBook, relating specifically to private equity activity:

The total number of deals in 2021 totaled 8,624 with an enterprise value of $1,237.5 billion representing an increase of 80% over the prior year in deal value.
Growth equity transactions totaled 1,367, with a transaction value of $113.4 billion representing an increase of 30% and 44% of transactions and deal value, respectively, from the prior year.
PE exit activity topped $850 billion in 2021, a 136% increase from 2020.
Funds raised $301.3 billion in capital, representing an increase of 11% over 2020, with just over 50% of total capital raised specific to middle-market funds ($154.5 billion).

All in all, 2021 was an incredible year for private equity and deal-making. With the substantial amount of dry powder waiting to be deployed, the overall sentiment is that deal volume and activity are not expected to slow as we head into 2022. However, there are some headwinds to be on the lookout for, such as inflation, rising interest rates, and regulation. Here are some key dealmaking trends to watch for:

ESG, an acronym for environmental, social and governance, is becoming much more prominent for PE funds, both at the fund and portfolio company level mainly due to investor demand for both parties to disclose their ESG practices. Investors may regard ESG goals as a critical element in building a more sustainable business that can adapt more quickly to shifts in the market. In addition, this investor demand is also spilling over to the service providers who service PE funds and portfolio companies, so it will be crucial that these firms have an ESG program for their own business operations.
Virtual M&A – The M&A process has been virtual for the better part of two years since the start of the pandemic. Dealmakers have resorted to software and technology, such as virtual conference calls and robots/drones for completing facility tours. Overall, the use of technology in transactions has resulted in cost efficiencies and also potentially increased speed in completing transactions. The expectation is that virtual M&A is here to stay, with most dealmakers adopting a hybrid approach of using technology and in-person visits during the due diligence process.
Growth Equity Funds had a banner year in 2021. According to PitchBook, 104 growth equity funds closed on a combined $74.2 billion in fundraising in 2021. The increase in growth equity fundraising is driven by the pace of capital being deployed into high-growth companies in industries such as technology and health care. Additionally, growth equity funds have realized stellar returns as their investments exit through the public markets or are marked up by subsequent capital raises. Given the substantial increase in growth equity fundraising and the accelerating number of companies in the marketplace looking for growth capital, deal volumes should remain high through 2022.
Target Valuations – High transaction multiples aren’t anything new; multiples have been substantially growing over the past few years given the large amount of successful fundraising and increased competition for deals. As target valuations are at all-time highs, fund managers will have to be creative and operationally-focused to continue to generate the returns expected by investors. One strategy expected to continue is a buy-and-build strategy, which includes a roll-up of multiple smaller players or multiple bolt-on acquisitions that can drive meaningful scale. Additionally, PE funds may hold investments for longer than the standard five to seven years through the use of longer-dated continuation funds and other sales of PE-backed portfolio companies to other PE firms.
Macroeconomic Conditions – Low interest rates and decreased taxes have contributed to the booming M&A market. Firms are now grappling with inflation, supply chain disruptions, rising interest rates and greater regulation, which could drive a wrench into the deal-making momentum. In diligence, firms are focused on increasing costs driven by inflation and the ability to pass those cost increases to customers. In the event that rising costs cannot be passed to customers, it may result in downward adjustments to EBITDA, thereby lowering adjusted earnings. Additionally, the impact that rising interest rates could have on valuations and transaction volume is yet to be seen.
COVID-19 and PPP Loans – Over the course of 2021, many of the PPP loans obtained in 2020 and 2021 have been forgiven by the SBA. Further, payroll taxes deferred under the CARES Act are likely still on the company’s balance sheet. PPP loan forgiveness does not necessarily remove all risk. If the SBA were to evaluate a PPP application and find misstatements that would render the loan or forgiveness ineligible, the buyer could become responsible for the repayment of such amounts (plus penalties). Dealmakers should be cognizant of the tail on the PPP loan and deferred payroll tax payments as they are preparing the definitive deal documents.

Overall, there is optimism that 2022 deal activity will continue at the historic 2021 levels due to the amount of dry powder in the market and pressure to put that capital to work. Given the sizable multiples being paid, dealmakers will need to be smart in the M&A process to ensure that the forecasted growth in revenue and earnings is achievable to deliver the returns promised to limited partners and other investors in the fund.