Private Equity - What is Fuelling the Activity?

Private Equity (PE) firms take investor capital and use it, alongside debt, to buy companies with the view that they can be sold for a higher value in the future. Contrary to what people may imagine, the PE industry has seen a boom in activity since the beginning of 2020.

What is fuelling this growth and what sectors have seen the highest amount of activity?

During the first months of 2020, the number of buyout deals increased dramatically. According to the Institutional Investor, more than 5,500 buyout deals were announced in 2020, an increase on the previous year. However, the size of these deals is down 6%. According to Refinitiv, this is explained by a “bumpy year for valuations” because of the impacts of the coronavirus pandemic.

The growth in this activity is expected to extend into 2021 with analysts predicting a record-breaking year for PE funding. But what is driving this increased activity?

One explanation is that PE firms raised a record-breaking amount of capital in 2019, and therefore, going into 2020 were sitting on a lot of cash.

Another explanation is that the coronavirus pandemic has brought about significant business turmoil meaning many businesses are seeking to consolidate their operations. PE firms are acting as a buy-side agent in this scenario and are swooping up these low valued targets. According to Refinitiv, of all M&A activity in 2020, PE firms made up 15% of total deals, a 2% increase from the previous year.

Extremely low-interest rates are also creating a favourable environment for PE firms. Since many PE firms use leveraged buyouts that involve large amounts of debt, this debt can be borrowed at a cheaper rate, accordingly, fuelling the increased activity.

One sector that has seen an incredible amount of activity is the Industrial Sector. According to Globe Street, Kohlberg Kravis Roberts (KKR) recently acquired a 9.7mn square foot industrial portfolio. However, this isn’t the first. KKR has also acquired several other portfolios in the last few months, and in December, acquired 2 industrial distribution properties in Texas for $171mn.

But why are we seeing a buying-spree of industrial portfolios?

As many countries entered lockdown and implemented the need for social distancing, this shifted consumer spending habits to online shopping. Consequently, we have seen a boom in the e-commerce sector which has seen extraordinary growth since the pandemic began which, according to Forbes, has had its growth sped up by 4 to 6 years.

Holding these portfolios is likely to be very beneficial as we move into a post-Covid economy, and as the e-commerce industry continues to expand.

The combination of a low-interest rate environment, increased business consolidation and the boom in e-commerce has allowed these cash-abundant PE firms to increase their business activities. However, all may not be rosy as these firms would have taken a hit to their portfolios when the pandemic began and whether they will reap the rewards of their recent activity in the future, only time will tell.