Q2 2021 Investment Insights & Analysis

1.  Impact companies continue to deliver higher returns compared to the S&P 500.

Impact companies continue to outperform the S&P 500 in the 2nd quarter of 2021 compared to the same period last year. According to an article by the institutional investor, ESG investing has often been criticized as failing to maximize returns; however, that concept continues to be disproven. A report by S&P Global that analyzed 26 ESG focused ETFs and mutual funds from March 5, 2020 to March 5, 2021, found that ‘19 of the funds grew between 27.3 percent and 55 percent, outpacing the S&P 500 index’s 27.1 percent rise.’

Matthew Slovik, head of global sustainable finance at Morgan Stanley, said in an interview that “the performance trade-off has been if not the biggest, one of the biggest myths around sustainable finance.” “I think that more and more research, whether it’s from the Morgan Stanley Institute for Sustainable Investing, from S&P, from Oxford or Harvard or others are showing that sustainable investing can in fact, perform and deliver stronger risk-adjusted returns.”

2. Capital seeking Impact Investments is on pace to reach pre-pandemic levels of 2019.

Fundraising continued its recovery in Q2 as institutional investors moved away from conservative decision-making they adopted in 2020 and increased their alternative asset allocations. Due to this development, dry powder is on pace to reach its pre-pandemic levels by the end of 2021.

Nick Fessler, vice president at Twin Brook Capital Partners, states that there was an abundance of dry powder in PE and private debt in 2019 and early 2020; then the pandemic hit, and markets ground to a halt as sponsors and lenders alike turned inward to focus on their existing portfolios. “Now that some of the uncertainty plaguing markets last year has subsided and there is more visibility around company performance. I think many are looking for ways to put their money to work.”

In a recent Q&A with PitchBook, Ken Fleming and Brian Francese, partners at Baker Tilly, said that they “are beginning to see LPs inquire more frequently about the ESG positions of PE funds as they look to commit capital. On the flip side, they are also seeing sellers ask PE funds about their current ESG position. Considering the amount of buy-side competition in the market, sellers may be faced with multiple offers, and ESG positions may be a differentiator. PE is taking notice of the ESG conversation, and operating companies need to be aware investors are beginning to make ESG part of their due diligence process, whether that be at the platform level or at the bolt-on level.”

3. Venture capital valuations are resilient in cyclical downturns due to the long investment horizon. Early and later stage valuations continue their rise as angel to seed valuations increase from a slight dip in the first quarter of 2021.

4. The trend towards elevated buyout multiples continues from the beginning of the year through Q2 of 2021 with 27% of transactions being over 20x EBITDA. 

Median middle market EBITDA multiples rose by 22% in Q2 of 2021 to 11.6x compared to 9.5x during the same period last year.

According to a PitchBook analyst report, the overall US PE market has continued to trend toward elevated buyout multiples, with around 27% of transactions being over 20x EBITDA so far in 2021. This trend is expected to continue through the end of 2021. The higher multiples are a result of the mix of transactions weighted toward larger or faster-growing companies and robust valuations that are taking place up and down the market. For PE firms with $500 million+ in AUM, firms are competing with both highly acquisitive strategics and hundreds of uncommitted SPACs. As a result, this has forced many firms down market to push up the prices of lower-middle-market platforms.

5. US PE deals increased in value and number across the board in Q2 of 2021. 

US PE transactions grew at a rapid pace in Q2 compared to the same period last year with mega-deals ($2.5 Billion +) and middle-market ($100 million to $500 million) deal values more than doubling to $50.6 billion and $20.6 billion respectively, from $24.3 billion and $9.2 billion in Q2 of 2020. The lower middle market ($1 million to $25 million) experienced modest growth in deal value from $3.1 billion in Q2 of 2020 to $3.7 billion in Q2 of 2021. Deal counts were up across all deal size categories.

According to a report by PitchBook, the drivers were the current economic recovery, cheap debt, ample dry powder on the buyside, imminent possibility of a capital gains hike, and elevated pricing on the sell-side. Additionally, Investor confidence has grown as the Centers for Disease Control (CDC) reports that 50% of eligible adults are fully vaccinated and positive economic indicators like unemployment claims have fallen to their lowest levels since the pandemic began.