In the midst of the pandemic, there were a lot of questions around how all markets, but private markets in particular, would weather the storm. As we move into the final months of 2021, it has become increasingly clear that the private market momentum which began to build in the back half of 2020 has shown no sign of abating. 

To start, deal making looks to be on pace for a record year in 2021, and we are gradually seeing deal activity broaden out into the middle market. According to Pitchbook, middle-market deals accounted for 64.8% of overall PE deal count in the first half of 2021, the highest annual proportion on record. From a sector perspective, deal activity in software remains robust, and is increasingly focused on opportunities in cybersecurity. At the same time, healthcare has seen the wind remain at its back after a very good 2020, as the pandemic has led many individuals to take a more proactive approach to both physical and mental health. 

Much like has been the case in deal making, exit activity is also on track for a record-breaking year. However, in contrast to what has been seen on the deal side, a handful of large exits, particularly via the public markets, have boosted the 2021 figures. At the same time, corporate acquisitions are growing as a share of total exits, as companies continue to streamline business models and rethink essential services in the aftermath of the pandemic. On the other hand, sponsor-to-sponsor activity remains fairly timid, but could accelerate as GPs increasingly focus on inorganic, buy-and-build strategies. 

It is interesting that deal making has remained so strong against a backdrop of elevated valuations. In our view, this dynamic is a direct result of elevated levels of dry powder, robust demand for high yield debt, and a growth-centric market. As such, it is not clear that purchase price multiples need to decline meaningfully anytime soon, although a notable rise in interest rates poses the greatest risk to the current dynamic. Furthermore, given this appetite for high yield debt, GPs are engaging in record levels of dividend recapitalization and refinancing activity. How long this persists will be a direct function of how U.S. monetary policy evolves over the coming years.

Elevated purchase price multiples (PPMs) may be here to stay

U.S. LBO PPMs, equity and debt over trailing EBITDA

Sources: S&P LCD, J.P. Morgan Asset Management.

Data are as of September 14, 2021

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