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PE Drives Growth of M&A

By Glen Lee:

In 2021, we saw a substantial rise in the number and volume of private equity (PE)-backed M&A deals. With private equity becoming one of the biggest drivers of M&A in Asia and globally, in this article, we set out to take a closer look at the growth of the PE industry, the factors that have fed into the boom, the sectors that have benefited from this trend, and the outlook for PE-backed M&A deals.

Growth of PE Deal Volume and Deal Value

Throughout 2021 and in the first quarter of 2022, the Chinese market witnessed the largest PE funding for the M&A market. Specifically, breaking down 97 PE-backed mega deals worth more than $ 1 billion, we see that these deals were broadly targeted at China’s broad domestic economic objectives with a particular focus on areas such as industrial upgrades (23 deals worth $56billion), dual circulation (17 deals worth $31 billion), and ESG (9 deals worth $26 billion).

Fueled by global PE deals and value growth, the market witnessed significant growth in private equity-backed M&A deals as well. In terms of the global PE deal count, the deal counts have increased from 7549 to 10206 and the global PE deal value increased from 565.1 million to 1002.8 million, demonstrating a growth of 26% and 77% respectively (shown below in Figure 1). Globally, almost 40% of the M&A deals involved private equity in 2021, with private equity-backed deal volume constituting 45% of total M&A deal value.

Figure 1: Global PE Deal Volume and Deal Value ($ Billion) [Source: KPMG]

Reasons behind the growth

In 2021, we saw 3 main factors that led to PE-backed M&A deals: a strong earnings season with a low-interest-rate environment, recovery of business activity, and the Biden administration’s new directives, which put closer scrutiny on M&A activity. To start with, strong earnings and a persistently low-interest-rate environment in 2021 led to more private equity-backed M&A activity. When interest rates are lower, investors have a tendency to look away from fixed income and credit securities, but rather at other investment opportunities such as PE. PE firms can enter transactions with reduced periodic outflow, increasing their ROI, and resulting in more private equity M&A activities.

Not only so, but the recovery of business activity to pre-COVID levels also supported earnings and boosted balance sheets, supporting underlying strengths that put M&A as one of the key options for business expansion. With the growing scrutiny from regulators, we saw more corporations taking greater caution in making large-sized deals M&A. Hence, private equity firms with dry powder came in to take on relatively smaller-sized deals that avoid the scrutiny of regulators.

Sectors that drive such growth

In China, the renewable energy sector was a hotspot for PE-backed M&A activity. With China’s recent (established in 2021) domestic objective of carbon neutralisation, PE funds flooded into the sector. For instance, the amount of PE funds invested in carbon reduction surpassed USD $22bn and those invested in green development surpassed USD $13billion. Indeed, China’s renewable energy industry achieved a record-breaking M&A transaction value of $59.6 billion in 2021, helping boost overall M&A activity. This trend is expected to continue especially with investors’ increased investment and attention on hydrogen and renewable energy more generally

Taking a high-level view, technology, human capital, and healthcare were the primary sectors in which the PE-backed M&A market boomed. Specifically, technology M&A was the biggest driver of the PE-backed M&A market: technology M&A accounted for 25% of deals by value and 30% by volume in 2021. Moreover, given increased transactions, technology is integrating into many industries (i.e financial services with fintech and healthcare with telemedicine). This very trend is called ‘disruptive M&A’ whereby non-tech businesses acquire technology companies that allow them to compete at new levels. Furthermore, the human capital sector has been witnessing growing demand from private investors. As many firms sought solutions to manage employee training, hiring and retaining talent in the virtual working environment due to COVID-19, the demand has surged. Finally, with the advent of telehealth, many companies are getting involved with veterinary services, animal care, and consumer products for animals, driving up the demand for health sector M&A.

Due to the lingering effects of COVID-19, many firms are still struggling with supply chain issues. To combat these bottlenecks, companies have chosen vertical integration that can help them have more control and flexibility over supply chains. Some companies are acquiring privately held transportation companies that resolve the supply chain issue. For instance, Vauban Infrastructure Partners’ purchased a 33% stake in the rail system Metro de Malaga for EUR 250m in 2021 Fall. Other companies are investing in suppliers in the same hemisphere to diversify and compete for new customers.


In China, antitrust and national security reviews are becoming more strict for both domestic and foreign M&A. On July 10th, 2021, the Anti-monopoly Bureau of State Administration for Market Regulation released a decision prohibiting the merger of two internet corporations. This was the first time the bureau prohibited such transactions in the internet industry, which in our view, hints at a stricter antitrust stance from the Chinese government. Furthermore, new regulations in the gaming services and beauty sector are expected to restrict some M&A deal activity. Specifically, minors now face gaming restrictions and the beauty industry now requires medical special licensing for advertisements.

Across the world, a similar shift toward anti-trust regulation and scrutiny can be also seen, especially in the United States. In comparison to the Trump administration, the Biden Administration has been taking a more aggressive stance on anti-trust regulation. In July 2021, President Biden instructed antitrust agencies to enforce stricter regulations to prevent competitive harm in the labour market and increase consumer prices. Moreover, they have modified various antitrust policies with aggressive approaches, adding to the uncertainty and administrative burden on any potential M&A deals. Further complicating the landscape, we note that the SEC proposed a rule to increase the transparency of private equity funds. From February 9th, 2022, private-equity funds are mandated to yearly audits and issue quarterly statements detailing fees and performance.

Thus, in light of recent interest hikes and the macroeconomic environment, PE-backed deal activity is expected to face some headwinds. In terms of buyout strategies, the increased interest rate would result in the debt becoming relatively more expensive. Leveraged buyout allows the private equity firm to finance the purchase of a target company with some capital of their own, and rely on debts such as loans. With increased interest rates, the debts become relatively more expensive and would result in reduced margins. New investments would result in investments that increase the financial strain on the target company and lower the potential return on equity.

Figure 2: Impact of Rising Rates on Entry Valuation for Companies with Floating Rate Loan [Source: WilShire]

As shown above, increased interest rates will drive higher discount rates and lower present values of future cash flows, indicating reduced entry valuation. On a similar token, exit valuations are also expected to fall. This could become a double-edged sword; valuation provides an attractive entry price for private equity investors that intend to make new investments, while it may become a less profitable exit price for private equity investors that intend to exit. To conclude, while the private equity industry has had a record-breaking year in 2021, it must embrace newly coming regulations, interest hikes, and changing macroeconomic environment.

Glen (Geonwoo) Lee
Glen is a first-year Mathematics and Economics undergraduate at the London School of Economics. He is a research analyst in the Fintech Society, writing bi-weekly newsletters on fintech trends and markets. With his fascination with the realm of finance and banking, he enjoys finding connections between digitalization and the banking industry.


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