2021: a record year in private markets

Private market activity was strong on all fronts in 2021. Fundraising and deal closing set new records. Robust release activity generated significant cash for limited partners. Venture capital investments that previously took a decade or more to generate cash exited much faster, helped by a strong IPO market and a resurgence of special purpose acquisition companies (SPACs).

During the third quarter of 2021, 6,004 private equity deals were closed for $787.6 billion, according to Pitchbook. This partial year dollar value was already at an all-time high. In addition, bankers and private equity funds report that pipelines were strong for the end of the year. The capacity of service providers forced companies to prioritize which deals would close in 2021 and which had to wait. Additionally, potential tax law changes have further fueled an already booming market.

Venture capital deal activity increased further, with $238.7 billion in value closed through September 2021. This is a significant increase from the $166 billion and $143 billion for the full year in 2020 and 2019, respectively. Mega deals — those worth more than $100 million — were the biggest contributor to the jump, with $136 billion closed through the third quarter of 2021.

Funds returning to the market faster and fundraising delayed in 2020 helped boost fundraising activity. In private equity, the average number of years between fundraisings fell from 3.5 years between 2020 and 2021 to 2.8 years. It was closer to five years in 2011. As a result, fundraising likely set a record in 2021, topping $1.2 trillion in private equity and venture capital. easily exceeding $100 billion.

The volume of capital raised has raised some concerns. Thirty-five percent of respondents to Mergermarket’s 2021 survey cited the amount of money and the ability to put it to work as the biggest challenge in the private equity industry. Capital has become more concentrated, as big funds over $1 billion accounted for about 70% of funds raised last year. The need for these larger funds to deploy capital has supported strong exit values ​​for smaller lower middle market funds. This is one of the reasons why CM continues to favor investing in the lower middle market.

Acquisition prices in buyout transactions remain elevated on a historical basis, as they have in recent years, with a median EV/EBITDA multiple of 12.8x. For scale, this multiple was 10.3x in 2007 and the peak was 14.3x in 2019.

In venture capital, valuations have risen aggressively in 2021. Early-stage round values ​​are up 54% from 2020, while late-stage rounds are up 168%. Higher audience multiples partly fuel this. For example, the multiples of software as a service (SaaS) companies have increased by 375% since 2016. Although there are fundamental reasons why these companies are more valuable, the evolution of prices is not without worry. This is especially true in late-stage companies, where bid prices are closer to perfect with less room for error.