The industry is set to break every standing record since 2006.
Private equity exceeded $1 trillion in deals for 2021. By all accounts, the industry is set to break every standing record since 2006. Rewinding back to June 2020, it is hard to reconcile this year's bull market, especially given the continued prevalence of the COVID pandemic. The confluence of continued government stimulus, cheap debt, looming capital gains tax hikes, and receptive public markets (including SPACs) continue to enable the PE boom. Regardless of how you cut the data, the fundamentals of private capital investment – fundraises, dry powder, investments, exits – show no indications of slowing.
Several drivers of the market’s highs are worth unpacking, especially from the prism of middle market investors. First, middle market fund returns (measured by one-year horizon IRRs) have not bounced back with the same vigor as $5 billion-plus funds, which are nearing all-time highs. This is despite an uptick in the median multiples achieved in 2020 and 2021 exits across the middle market. Second, LPs have indicated a growing preference for mega funds, allocating larger shares of capital to the largest funds. This has resulted in a meaningful increase in large fund dry powder relative to middle market funds – from 37% of total PE dry powder in 2016 to 50% in 2021 – and a growing sense of urgency across mega-funds to deploy capital. This will continue to push deal multiples higher.
This environment creates future challenges for middle market funds. While current exit multiples are exciting, buying assets today at higher multiples makes generating above market returns for recent fund vintages increasingly difficult. However, it is still attainable. To achieve above-market returns, middle market funds must emphasize quickly identifying and creating value (even pre-close) for each target.
How Pointe can help
Pointe PE is dedicated to enabling sponsors create value with their investments. With more than 350 deals under our belt, we have found that each sponsor has unique needs. From targets in data poor market segments to first-time sellers underprepared for the process, our process is empathetic and “rightsized” as thought partners. For Pointe, that is all about delivering informed insights and remaining focused.
Regardless of the ask, our methodology is evidence-based. We combine original research and advanced analytic techniques to deliver the type of informed insights that enable you to move forward with conviction. We are also zealous about keeping an eye on the prize. We map all our efforts to the deal thesis or a value creation pillar. This ensures we can stay lean while still driving an overweight impact.
Pointe’s solutions include:
Pointe supports middle market sponsors across the full investment life cycle, from deal generation and diligence to portfolio company value creation and exit. Pointe’s solutions include:
Commercial Due Diligence: We validate the critical elements of your investment thesis via insights informed by proprietary datasets, giving you an edge both during diligence and after you close.
Target Identification: We help to clarify where to look and which candidate to pursue via our strategic search-and-screen approach.
Value Creation: Once the acquisition is complete, we help guide management to a priority set of strategic initiatives and develop plans on how to realize the identified potential.
Vendor Due Diligence: We help develop a compelling equity story that articulates an asset’s potential while helping anticipate (and plan for) prospective buyers’ challenging questions.
A PE fund was on an accelerated timeline to prepare its industrial production portfolio company for a sales process. Current sponsor anticipated that most prospective bidders’ thesis would focus on the target’s attractiveness as a platform play. Pointe developed an independent set of materials to model the market (and target’s) potential and prove out a variety of inorganic consolidation theses. Pointe’s unbiased insights enhanced the process and supported an abbreviated close timeline.
Middle market PE fund was evaluating the feasibility of an investment in a tank testing and environmental companies service company. The entity, which focused on petroleum services and worked with leading gas station operators and rental car companies in the US, was hypothesized to present attractive exposure to the market’s highest growth segments. Pointe led a commercial diligence and modeling exercise to determine exposure-weighted growth by industry segment for the target. Pointe’s evaluation supported the funds hypothesis and enabled a successful bid.
A PE fund had accelerated exclusivity with a provider of automation solutions. This target primarily focused automated storage and retrieval solutions (ASRS) for e-commerce cos. and players in the food & beverage space. The fund’s thesis was grounded in assumptions around market attractiveness and staying power of COVID-related e-commerce trends. Pointe led a highly-focused diligence effort intended to prove out the sustainability of demand trends for warehouse automation solutions. Pointe’s analysis empowered the fund to move forward and capitalize on a preemptive (and advantaged) deal.