The US private equity industry was hit hard in 2020, amidst the pandemic and panic, as were many others. A year later, 2021 has seen a full recovery and more. According to PitchBook’s Q2 2021 US PE Breakdown, dealmaking, exits, and fundraising are on track this year to surpass record figures.
But with the frenzied pace of deals, it is more important than ever to be on the lookout for disreputable partners and scammers.
PE dealmaking surged in the second quarter of 2021, at what Pitchbook called “a frenetic pace” of over 3700 deals worth about $456 billion. In 2020, there were about 5,730 deals worth $711 billion.
The spur to close this year’s deals is attributed to companies’ desires to recoup their losses of last year, but also due to the anticipated increase of the capital gains tax, which will strongly affect family-owned businesses and both inbound and outbound US investments.
Exits and Fundraising
PE-backed exit activity is already nearing the annual figures of 2020, with the largest exits dominated by SPACs and IPOs. In the first half of the year, exits totaled 676 and were valued at nearly $356 billion (which surpassed the annual total of 2019, which came to $323.3 billion).
The high number of exits is a result of the ability of public markets to provide a good exit space for PE firms, which was not necessarily the case in previous years. In the fundraising arena, LPs are continuing to view PE investments as wise and a way of diversifying their portfolios, which has resulted in some mega-fundraising successes.
It is easy to get caught up in the wave of success surrounding the PE industry in 2021, but in a field that is so fast-moving and dynamic, it is important to take proper precautions against scammers and potentially bad business partners.
Performing due diligence is one way to avoid these potholes. Due diligence can include investigating potential deals, partners, etc. and hiring experts to review financial reports for fraud.
In times when the PE sector is booming, avoiding overconfidence is a helpful tool in making correct decisions. When the entire industry seems like it is invincible, you do not want to be the one to make a basic mistake and prove it wrong. Overconfidence might cause you to rely on reputation alone or not dig as deep as you can, and this is a mistake.
When looking for deals, exits, and investors, poring over every detail is crucial. 2021 is shaping up to be a fantastic overall year for PE, but it is every individual’s responsibility to make sure it is a fantastic year for their own personal business aspirations.