Confidence in the U.S. economy and private markets have returned to pre-Covid levels according to Antares Capital’s fifth annual outlook survey, presenting analysis of perspectives on the middle market from portfolio companies, private equity sponsors and investors.
Despite market uncertainty at the height of the pandemic, positive economic sentiments have sharply rebounded in 2021. Fifty-nine percent of sponsors and 74 percent of investors are confident in the global economy over the next 12 months, up dramatically from 24 percent and 55 percent for the same groups, respectively, in 2020. Participants also report a 2021 recession is “very unlikely” despite lingering levels of financial stress in borrower portfolios.
“Middle market participants expect high levels of deal activity, as well as revenue and Ebitda growth as we emerge from Covid-19’s headwinds,” said David Brackett, chief executive officer of Antares Capital. “Although survey results indicate a few bearish perspectives, participants see fiscal and monetary stimulus coupled with high infrastructure spending as strong tailwinds against potential challenges like rising taxes and regulation.”
Survey results highlight increased investor interest in private debt due to higher yield premiums, favorable middle market performance throughout the stress of 2020 and a desire to tilt toward floating rate assets to hedge against inflationary risk. The report suggests a significant uptick of investors expect leveraged loan volume to rise this year, with 74 percent predicting volumes to increase in 2021 compared to only 19 percent in 2020.
The survey also suggests higher demand from private equity sponsors selling portfolio companies to a SPAC rather than raising money for such a company. Findings suggest 60 percent of private equity sponsors might sell their portfolio company to a SPAC, while a lesser 20 percent said they might raise funds to establish one.
Most sponsors and investors expect M&A activity to pick up in 2021, with about two thirds expecting upticks in LBO’s and add-ons activity – up sharply from last year’s reading. Key factors that indicate rising middle market M&A volume include increased capital market liquidity year-over-year and consistent levels of dry powder going into 2021. These influences are supplemented by a backlog of delayed transactions caused by the pandemic. Sponsors’ portfolio company sales are also likely to increase in 2021 with 67 percent expecting higher exits compared with a reported 21 percent in 2020.
“Today’s middle market features favorable conditions for private equity transactions,” said Brackett. “Survey participants are eager to deploy dry powder. We continue to expect higher than average capital market liquidity leading to significant dealmaking in the near-term.”