Investor Enthusiasm
An influx of private capital provides favorable dynamics for business owners seeking a transaction over the next decade
Both public and private capital markets have experienced a myriad of changes over the past eighteen months, though two characteristics have remained relatively constant: investor enthusiasm and dry powder. The former points to investors’ desire to identify investment opportunities commensurate with their stated risk profile, while the latter is a measure of capital available for investment. The two are often highly correlated – maybe now more than ever – and sellers stand to be the biggest beneficiaries of these two favorable market indicators.
When we reference investor enthusiasm, we’re really referencing the measure of investors’ desire to put capital to work through various investment vehicles. Our specific focus here is related to institutional investors in the private capital markets – namely private equity funds, family offices, and asset managers focused on alternative investments. One measure of their growing enthusiasm can be found simply in the number of institutional capital firms: 1,900 to 6,600 from 2000 to 2016, a 247% increase over the period. The rise in the number of firms coupled with the increase in average fund size (Figure 1) are likely driven by private markets’ performance vs. their public counterparts from 1996 – 2016 (Figure 2).
COVID-19’s impact on private markets was substantial, but to-date, relatively short-lived. The abrupt shutdown of the U.S. economy in late Q1 and Q2 of 2020 caused a multitude of ripple effects. For private market investors, specifically, it meant that valuation measures were upended, and many deals were either shelved or cancelled completely. That dip in activity all but requires a rebound in deal volume – as the capital still must be put to work and deals still must get done. Deal volume in Q4 2020 and Q1 2021 returned to pre-pandemic levels (Figure 3), and the collective view from our private equity peers is that Q3 and Q4 of 2021 will reflect a record amount of deal volume.
While there is no single measure of investor enthusiasm specifically for the private markets – we can glean plenty from the data above that tells us there is a strong hunger for deals. The best indicator for investor enthusiasm, however, might actually be dry powder.
Dry powder, which we’ll define as “highly liquid marketable securities and cash which is committed or available for immediate deployment,” has continued its rise to all-time highs dating all the way back to 2006 (Figure 4). The COVID-19 pandemic furthered the rise in dry powder accumulation due to the previously mentioned deal volume drop in Q2 and Q3 of 2020. Nearly $3 trillion is set to be deployed over the next decade, meaning competition for opportunities to invest that capital will be fierce.
So how do sellers benefit? How are they poised to gain from such favorable market dynamics? The obvious answer is competition drives up valuations (Figure 5), so too does the mandate to invest the historic mountain of dry powder. There are other benefits as well. We believe deal structures will be forced to become more dynamic, flexible, and favorable to sellers as investors look for more creative ways to put their capital to work. Recapitalizations, earnouts, and seller re-investments will all likely look different over the next decade – slanting more in favor of sellers.
If you are a business owner contemplating the sale of your business we encourage you to seek out advisors who can help you prepare for a process to maximize the value to you in a transaction. We welcome the opportunity to connect to answer questions and to help you begin to understand the many options available for exiting your business.
About Infinity Capital Partners
Infinity Capital Partners is an Oklahoma City-based middle-market investment bank offering a broad range of advisory services to private companies and financial sponsors across a variety of industries. Infinity works closely with owner-operators, shareholders, founders, and management teams of private companies to provide tailored services including M&A advisory, debt and equity placements, recapitalizations, and strategic advisory. For more information about Infinity Capital Partners, including a list of current projects, please visit our website at www.infinitycapitalpartners.com. Securities placed through Infinity Capital Securities, LLC. Member FINRA.