Private Equity Firms Expect Wave of M&As in Second Half of 2021

KEY TAKEAWAYS

Deal volumes and valuations are expected to pick up.
Firms expect more sellers will be open to making deals in the third and fourth quarters.
Interest in international deals continues to decline.

Despite ongoing challenges from the economic turmoil of COVID-19, private equity (PE) firms expect to see a wave of merger and acquisition (M&A) activity during the second half of the year, spurred by a waning pandemic and the specter of higher capital gains taxes, according to a survey from Citizens Financial Group.

The survey polled 470 US-based middle-market firms with $50 million to $1 billion in revenue that are currently engaged in, or are open to M&A activity, as well as 230 private equity firms with clients in the same revenue range. Core business sectors included health care, technology, industrial, consumer services, and business-to-business (B2B) services, among other industries.

“Many business leaders expect the continued rollout of vaccines and the prospect of increased taxes to spur a robust year in terms of deal flow, especially in the second half,” Ralph Della Ratta, chairman of Citizens M&A Advisory, said in a statement.

According to the survey, companies will rely on mergers and acquisitions for growth in 2021 and more sellers will be open to making deals during the third and fourth quarters.

While economic outlook is usually the main factor in a company considering an M&A transaction, the survey found that COVID-19 and the Biden administration’s tax policies are top drivers for firms this year, with increased expectations for a surge in M&A if the capital gains tax rate is hiked. Optimistic expectations for corporate valuations and deal flow this year are also contributing to a rosy M&A outlook.

Expectations for robust M&A activity come despite firms having a less positive outlook for the US economy for the year. Only 47% of firms polled said they have a positive outlook for the economy in 2021, compared with 61% of firms who said the same thing in 2020. The companies had a more positive outlook for their own businesses in 2021 with 55% saying they were optimistic about their outlook this year, although that was down from 65% last year.

“2020 left a backlog of pent-up demand for M&As,” said Jim Childs, CEO of Citizens M&A Advisory. “With strong valuations, we think a lot of PE firms and liquidity-seeking owners will be eager to get to the market.”

The survey also found that interest among firms to conduct international deals continues to wane as only 47% of buyers and 33% of sellers said they were interested in global M&A deals, down from 51% and 41%, respectively, last year, and 56% and 49%, respectively, in 2019. Citizens Financial said that because international deals are inherently more complicated, the continued decline in sellers’ interest is a sign they are looking for execution certainty.