Global PE activity in 2021 struck a new record, with US$2.2 trillion in deals, almost doubling 2020's total. Following such a groundbreaking year, the first quarter of 2022 has unsurprisingly seen a slowing down of activity.
A total of 1,704 PE deals took place in the first three months of the year, worth US$326.9 billion in aggregate. This represented a 22% drop in volume and a 35% drop in value compared to Q1 2021.
Exit activity fell further than buyouts. The number of exits (both to trade buyers and other private equity firms) dropped 39% to 512 transactions in Q1 of this year versus Q1 2021, while their aggregate value dropped by 53% to US$109.9 billion. The number of buyouts (including both primary and secondary buyouts) dropped by 16% and 30%, respectively, to 1,332 deals worth US$240.9 billion.
Despite the Q-on-Q fall in activity, PE still made up a significant proportion of overall M&A activity. PE buyout value delivered 24% of all M&A deal value in Q1. Although a lower proportion than Q1 of last year (27%), this metric has been trending up over the past decade as the PE industry grows, its players raising larger and larger funds amid a low interest rate environment. In 2011, PE buyout value only made up 13% of total M&A.
The largest buyout of 2022 so far has been Blackstone Group’s €24 billion recapitalization of its portfolio company Mileway, a European logistics business. Blackstone chose to invest more in the business rather than sell, due to soaring demand for warehouse space during the pandemic, which it is betting on staying strong.
The Mileway transaction, if completed, would be among the top ten largest real estate transactions on Mergermarket record (since 2006).
Investors bet big on the hybrid workplace
Another buyout deal displaying longstanding trends that have only accelerated during the pandemic is the US$16.6 billion purchase of US software company Citrix by Vista Equity Partners and Evergreen Coast Capital.
Citrix’s software—which enables employees to work securely from their devices remotely—was one of the major “winners” of the pandemic as the hybrid workplace setup quickly became the norm. Just last year, Citrix acquired Wrike, a collaborative work management platform, for US$2.3 billion in a bid to expand its influence in this fast-growing industry. Evergreen Coast and Vista are betting that the switch to hybrid working is here to stay.
Exits fail to live up to 2021’s record
Although the drop in PE exits was steeper than it was for buyouts, these figures should be viewed in context: 2021 was a record-breaking year for exit activity, and Q1’s value and volume figures remain consistent with pre-pandemic levels of activity.
The largest exit deal to take place in Q1 was Bridgepoint’s sale of testing company Element Materials to Singaporean investment firm Temasek. The transaction, valued at US$7 billion, was the largest exit in Bridgepoint’s history, indicating that mammoth deals are continuing to change hands if the right terms are met for highly prized assets.
London-based Element offers testing services across a range of sectors including aerospace, autonomous vehicles and vaccine components. Following the deal, the company is set for growth in life sciences and connected technologies—both industries that have flourished during the pandemic.
Private equity activity was a key driver of the record levels of M&A dealmaking seen in 2021. While 2022 has been slower to pick up, private equity’s role in global dealmaking remains substantial.
The trends of low interest rates, record levels of dry powder and readily available financing collectively underscored a groundbreaking run for PE since the financial crisis.
Looking ahead to the remaining quarters of 2022, there are significant headwinds. Dealmakers will be keenly watching for further changes in interest rates, especially since the UK Bank of England unexpectedly increased rates in December 2021. The US Federal Reserve, meanwhile, raised its benchmark rate from 0.25% to 0.5% in mid-March and is expected to hike up rates several times this year to counter inflation.
In the near term, PE activity is unlikely to regain the same momentum it had in 2021. However, events over the past two years have proven that PE dealmakers are exceptionally resilient to global shocks. And with dry powder sitting at US$1.3 trillion, savvy PE practitioners will find a way to navigate uncertainty and make smart investments.