This Private Equity Sector Had a Stellar 2021 — But Don’t Expect Record Activity This Year

Analysts expect U.S. middle-market dealmaking activity to slow in the first half of 2022.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

U.S. middle-market private equity firms experienced a year of strong dealmaking and exit activity in 2021. The road ahead may not be quite as smooth, however.

Last year, middle-market PE firms closed 4,121 deals, accounting for a combined total of $602.6 billion — an all-time high for the sector, according to PitchBook’s PE middle-market annual report, released on Monday. The previous record for dealmaking activity in PE middle markets came in 2019, when total deal count reached 2,775 for a combined total value of $400.4 billion.

PitchBook defines a middle-market deal as one in which a U.S.-based company is acquired through a buyout transaction valued between $25 million and $1 billion, with a fund size of $100 million to $5 billion. It doesn’t include growth equity deals.

PitchBook analysts and report authors Wylie Fernyhough, Rebecca Springer, and Jinny Choi attribute much of last year’s record dealmaking activity to widespread economic recovery from the Covid-19 pandemic. “2021 was definitely the most active dealmaking period in U.S. PE middle-market history,” Choi told Institutional Investor. “There are several factors that led to this: [There] was ample dry powder thanks to years of healthy fundraising, [and] PE firms were also able to get easy funding from the low interest rate environment we had post-pandemic.”

In fact, U.S. PE middle-market dry powder reached a record $449 billion in 2021, according to the report. Choi said the pandemic recovery also encouraged strong competition for assets, which helped elevate valuations and drum up the cumulative deal value for 2021.


Tax policy also played a role in last year’s PE middle market deal activity. According to the report, President Biden’s 2020 election and talk of an anticipated capital gains tax hike sparked concerns over diminished returns in 2022 and prompted an “end-of-year rush” to settle deals. In November, however, the Build Back Better plan was passed and didn’t include a capital gains tax hike, diminishing the urgency of deal closings and generally slowing dealmaking.

PitchBook analysts expect dealmaking activity to slow down in the first half of 2022 “as firms and banks work through the deal pipelines they had lined up in an effort to escape higher taxes,” the authors wrote. “We may see dealmaking slow down just because people don’t have [a] reason to rush to close deals anymore,” Choi added.

U.S. middle-market PE firms also saw record exit activity in 2021, with 1,091 exits at a total exit value of $241.7 billion. PitchBook analysts credit a number of factors, including a spillover of delayed exits from 2020, rising multiples as a result of economic recovery from the pandemic, which drove portfolio companies to meet price targets early and exit their holdings earlier than expected, and an influx of cash and dry powder on corporate balance sheets that drove them to buy more PE-backed companies.

In 2022, inflation concerns and potential rising interest rates may result in lower corporate margins and pressure on company multiples, which could result in slower exit activity. PitchBook analysts also believe that the Russia-Ukrainian conflict may produce economic uncertainty this year, resulting in more muted exit activity compared to last year.

“This has already taken place in public markets, with numerous high-growth companies seeing their trading price cut in half or more in a short period,” the analysts wrote. “The volatility effectively takes public listings off the table, although these are far less critical to the middle-market exit environment than to the top end of the market.”

Middle-market PE fundraising remained steady in 2021. Although it did not match or surpass its 2019 record of 182 funds with a total of $154.8 billion in capital raised, it ended the year at 140 funds and $111.7 billion. Last year’s figures also fell short of 2020’s fundraising numbers, which the analysts feel is a signal of a relatively slower recovery in middle-market fundraising than other areas of PE fundraising.

“We’re seeing a shift in private equity toward larger funds in general,” Choi said. “Investors are increasingly looking to allocate more capital to private equity and are looking for larger funds that can take in that capital. They’re also looking to simplify their manager relationships, which leads them to invest with larger firms that have multiple strategies that investors [might] be interested in.”

In fact, PitchBook’s data as of the third quarter of 2021 showed that larger firms with at least one mega-fund have launched an average of 2.5 new middle-market buyout strategies each year since 2011.

Coming off the back of an incredible year in the U.S. PE middle market, Choi said firms should brace themselves for a lot of uncertainty in 2022. “It’s unfortunate that investors have a lot to be wary of, including the ongoing inflationary environment and the financial fallout of Russia’s invasion of Ukraine,” Choi said.