The pickup in fundraising in 2021 reflects the move away from the “putting out fires” mentality brought on by the pandemic toward more stability this year, with firms better able to revert to fundraising. When looking at PitchBook data for the total dry powder available at the end of the second quarter, U.S. private equity firms likely have $1 trillion in capital available to deploy.
Outlook for second half of the year
Based on July data from Bloomberg, it appears that this breakneck pace in private equity deal activity, exits and fundraising may persist through the end of the year.
A key factor that points to continued strength in deal-making is the fact that fund managers have learned to conduct deals and some aspects of the due diligence process virtually. One benefit of virtual deal activity is that U.S. funds have increased their investment in portfolio companies outside the country. Another factor that will continue to support deal activity is that the U.S. economy has largely opened up, resulting in more in-person meetings. While knowing how to conduct a deal virtually is helpful, having the option of holding more in-person meetings will be beneficial in the long term.
Additionally, private equity as an asset class continues to be in high demand. Accordingly, Private Equity International’s December 2020 LP Perspectives Study showed that 80% of limited partners were confident the asset class would continue to perform in 2021. About 40% of the limited partners surveyed indicated they were under allocated in private equity and planned to increase or maintain their commitments. This, coupled with strong exit activity, indicates the second half of 2021 will be as hot as the first. While tailwinds are expected to continue stimulating private equity activity for the second half of the year, some downside risks could still arise.
After plummeting from peak levels in January, new reported COVID-19 cases and related hospitalizations and deaths have been rising again in the United States since early July. The spread of the delta variant of the virus has led some companies to push back return-to-office timelines and reinstate mask-wearing guidance. If the curve continues its upward trend and more restrictive measures are implemented to minimize the damage, there is a risk that economic activity and business sentiment will drop to levels that may lead to a slowdown in private equity activity.
Financial conditions have been very accommodative, with strong support from the Federal Reserve. A shift in conditions for the worse might put a damper on the frenetic pace of private equity deal activity and capital raising. While the risk currently seems low, this is worth watching, as it can change should markets look to test the Fed’s resolve and patience in normalizing monetary policy from the current ultraloose stance.
This happened in the first half of the year when fears that inflation might overrun benchmark interest rates led to a rise in market yields and a spike in stock market volatility, briefly sending financial conditions on a downward trend before the Fed regained the narrative. Fears of policy error as the Fed starts contemplating plans for slowing down its asset purchase program may trigger similar bouts of market panic.