M&A Back in Force, Asset Prices on the Rise in 2021 – BDO’s Private Capital Pulse Survey

M&A Back in Force, Asset Prices on the Rise in 2021 – BDO’s Private Capital Pulse Survey

Rosy Lum
Bliss Integrated Communication
(646) 846-0809 
[email protected] 

  • 91% of fund managers say asset prices will increase in the next 6 months

  • 94% say it’s important to their LPs that ESG be among investment criteria

  • Increased taxation of digital products and services is fund managers’ biggest tax concern 

CHICAGO, MAY 3, 2021 – Private equity and venture capital fund managers are anticipating the balance of 2021 to be awash with M&A activity and heavy competition: 91% say asset prices will increase in the next 6 months, more than half of whom believe those increases will be 10-25% or higher, according to BDO’s Private Capital Pulse Survey, released today.

“The last two quarters have seen a release of 2020’s pent-up deals coming to market. Coupled with federal economic stimulus efforts and tax policy changes, as well as the impact the pandemic has had on prompting business owners to consider selling, we will continue to see very healthy activity through the end of the year. Quality deals in attractive industries will continue to garner outsized multiples,” said Scott Hendon, National Leader of Private Equity at BDO.
The survey, which polled 100 private equity and 100 venture capital middle-market fund managers across the United States, reflects a shift in sentiment toward deal making: More than a quarter (26.5%, up 3% from the Fall 2020 Pulse Survey) said they would direct the most capital toward new deals and investments, while those who said they would direct the most capital toward de-levering portfolio company balance sheets decreased by 6%, from 13.5% to 7.5%.
But while private capital is back to sourcing and striking deals, fund managers remain wary of the lingering impacts of the pandemic on business and on the due diligence process, much of which has been conducted remotely: More than half (56%) say risk exposure uncovered during due diligence is the top challenge to closing deals or investing in the current environment, followed by increased competition from other buyers or investors, which saw a 15.5% increase to 48% from 32.5% last fall. Lack of transparency, including access to management teams or complete financial information, takes the third spot (46.5%).
Their investment strategies reflect a departure from the more cautious positions they took earlier in the pandemic. Venture capital fund managers identified early stage VC as their top investment strategy (79%, up from 67% in the fall), while private equity fund managers identified growth equity as theirs (63%, up from 47% in the fall).
“The global venture capital market has come back in full force as of the close of the first quarter, with strong funding across the VC spectrum, from seed to late stage investments. Strong interest in early stage VC investing signals that fund managers are looking to deploy capital in new and emerging companies and technologies to find that next diamond-in-the-rough investment that will carry the entire fund,” said Kevin Bianchi, BDO’s National Leader of Venture Capital.
Averaged across PE and VC fund managers, structured credit as an investment strategy saw the greatest leap, increasing 13.5% to 44.5% from 31% in the fall, underscoring the creativity deal makers are employing to get deals done today.


Key drivers of deal flow 

Private company sales and capital raises retained the top spot as the key driver of deal flow or investment opportunities in the next six months, and the number two spot went to succession planning, which rose 11% to 48% from 37%—an expected data point as the business impacts of the pandemic have prompted many owner/founders to consider accelerating the timing of a sale.
Investing in distressed businesses saw a slight overall decrease, dropping 2% to 44.5%, while corporate divestitures increased 6.5% to 38.5%. Interestingly, special purpose acquisition company (SPAC) exits came last among key drivers of deal flow, at just 12%.
Strategic buyers and investors still pose the greatest competitive threat to private equity and venture capital funds (52%), but hedge funds and mutual funds saw the greatest increase on average among competitors, coming in at 51% to take second place, up 12.5% from the fall. Other private equity and venture capital firms as a top competitor surprisingly fell by 8.5% to 36.5%, and SPACs took last place with just 23.5%.
With 91% of fund managers predicting an increase in asset prices, value creation will be pressured: Fund managers said the top post-M&A challenge was performance improvement, reducing costs and enhancing revenue, followed by leveraging digital tools for improved reporting and analytics and operational improvements.


What’s important for LPs: ESG

No doubt aided by the events of 2020, ESG investing has become a front-and-center priority. Asked how important it is to their LPs that their investment strategy incorporates ESG criteria, 94% of fund managers (96% private equity, 92% venture capital) indicated it was either “very” or “somewhat” important.
LPs’ attitudes toward ESG are reinforced in how fund managers ranked items of importance for their LPs: More ESG investment options (19%) were only a hair behind harvesting and realizing investment gains (20%) and co-investment opportunities (19.5%); these priorities are driving fund managers to direct the most capital toward new deals and investments. 
Additional findings include: 

  • Taxation of digital products and services is the top tax concern: Increased taxation of digital products and services was fund managers’ biggest concern (58.5%), beating out concerns for a potential capital gains tax increase by 8 points.  

  • The top long-term impacts of COVID-19: Digital capabilities of an acquisition target took first place for VC fund managers, while the importance of robust risk management in an acquisition target took first place for PE fund managers. Higher long-term ongoing valuations for certain industries is another top concern, as well as having a clear and robust supply chain strategy.

BDO’s Private Capital Pulse Survey is a survey of 100 private equity fund managers and 100 venture capital fund managers at firms in the United States. The survey was conducted by Rabin Research Company, an independent marketing research firm, in March 2021. Download the full survey findings here
About BDO's Private Equity Practice 
Strategically focused and remarkably responsive, the experienced, multi-disciplinary partners and directors of BDO's Private Equity practice provide value-added assurance, tax and consulting services for all aspects of a fund's cycle, wherever private equity firms are investing.  
About BDO USA  
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through more than 65 offices and over 740 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 88,000 people working out of over 1,600 offices across 167 countries.  
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com
Restructuring and turnaround services within the United States are offered through BDO Consulting Group, LLC, a separate legal entity and affiliated company of BDO USA, LLP, a Delaware limited liability partnership and national professional services firm. Certain restructuring and turnaround services may not be available to attest clients of BDO USA under the rules and regulations of public accounting.