Private Equity Now Accounts for 30% of M&A Activity

Private equity firms are playing a larger role than ever in merger and acquisition deals, according to a report by Ernest & Young.

Private equity activity now represents 30 percent of the M&A market, surpassing the prior peak of 25 percent in 2006, according to the report, which is expected to be released Friday. Throughout the first three quarters of 2021, private equity firms were involved in $868 billion worth of acquisition deals globally, “putting the industry well within striking distance for its first trillion-dollar year on record,” EY said. 

“For many firms, the lessons of the global financial crisis remain fresh: funds that retreated from investing during that time felt they should have been more aggressive in hindsight — a perspective supported by returns from that era,” according to the report.

The growth of private equity M&A activity has been driven mostly by three factors, according to Pete Witte, lead private equity analyst at EY. The first, he said, is a “cyclical” one driven by a strong earnings season and persistent low interest rates. The second is an “idiosyncratic element of the pandemic” as business activities return to pre-pandemic levels. Lastly, there is a “secular component” that comes from the regulators, particularly the Securities and Exchange Commission, which has been encouraging retail investors to enter the private markets, Witte said.

“It’s all of these tailwinds coming together this year and driving some really strong activity,” he added. 

Private equity firms have deployed most of their capital in the technology, consumer, and health sectors. Technology mergers and acquisitions, for example, accounted for about 25 percent of deals by value and 30 percent of deals by volume over the last twelve months. EY attributed the demand to software companies demonstrating “strong resiliency during periods of economic volatility.”

Meanwhile, consumer and health care represented 12 percent and 10 percent of PE deal value over the last year, respectively. Interest in health care has been driven by the sector’s perceived long-term growth prospects and their close ties with environmental, social, and governance investing, according to the report.

Fundraising has also played a vital role in driving up private equity activity. PE firms closed on commitments valued at about $400 billion during the first three quarters of 2021, an increase of 27 percent from the same period last year, according to EY. 

“Even into the first quarter of this year, fundraising has sort of trailed,” Witte said. But as travel resumes and economic activities return to normal levels, large private equity firms are “coming back quickly with new flagship funds after very short periods of time,” Witte added.

While mega deals with value of $10 billion or more are on the rise, the middle market has also emerged as a key pillar in the private equity market thanks to the rising interest in add-on deals, according to the report,

The large assets tend to trade at high multiples, while the smaller assets usually trade at lower ones, according to Witte. “So when your platform investments are so expensive, you can [buy] smaller add-ons to average down your purchase multiples,” he said.