U.S Q3 Private Equity Breakdown

The U.S private equity market in Q3 picked up right where it left off from Q2, marking a historic run in activity mainly in regards to robust economic growth, cheap debt, and a new precedent for doing deals faster. As of the beginning of October, private equity firms have closed a total of 6,004 deals totaling $786.6 billion in 2021. We continue to see strong fundraising postings from private credit lending funds. This will further the trend of private equity firms having access to ample amount of capital.

Pain Points for Sellers

The uncertainty surrounding a capital gains hike has rippled across M&A market. It has led to many deal pipelines being full through the end of 2021 as sellers attempt to front-run a potential capital gains increase. However, the increase is now expected to rise from 20% to 25% rather than a previous projection of 39.6%. This may result in transactions beginning to move at a more normal pace with firms not feeling as much pressure to front-run the potential capital gains increase. A return to a more normal deal pace may offset one of the biggest paint points of sellers with private equity firms in regards to sellers receiving the right mindshare from firms as seen in the past. This feeling is warranted as there has been a consistent downtrend in conversion percentage from confidential information memorandums to indications of interest in 2021.

Market Outlook

The digital software market has shown rapid growth over the course of 2021. This growth can be attributed to strong customer stickiness, strong recurring revenue models, proven ROI, and strong sponsor roll-up opportunities within the sector. Service-oriented sectors are expected to continue to rise as many of these businesses are on a local or regional level with repeatable recurring themes to revenue and earnings.

Supply Chain Effects on Markets

Hardware and manufacturing markets have been the most heavily effected markets due to the supply chain crisis in regards to raw material shortages. Inventory shortages of raw materials have delayed the installation process, pushing out revenue recognition by two to three quarters. With strong advancements in automation, many companies are reconsidering moving production domestic to become less reliable on foreign supply chains.

Sources: Fernyhough, Wylie. “US PE Breakdown Q3 2021.” 2021, October 12. www.pitchbook.com.