SRS Acquiom, a private equity-backed mergers and acquisitions administration platform that handles pre and post-closing administrative tasks in PE deals, has released their 2021 Deal Terms Study that outlines the aftershocks of the COVID-19 pandemic in the M&A market, from how deals are done to terms that parties negotiated. The study found that PE buyers, who were increasingly focusing on longer earnout restrictions, increased buyer equity and other negotiation nuances. The study was written by Chris Letang. The highlights of the study are as follows:
- Average Return on Capital: The average return as a multiple of equity capital invested for 2020 was 6.3x, with a median return of 3.5x
- Investment Horizons Steady: Median figures for years to exit after the first investment (6 years), equity financing rounds (3 years), and equity capital invested ($26MM) were largely unchanged since last year
- Buyer Equity Increase: There was an increase in the percentage of deals with buyer equity as a component of deal consideration.
- 21 percent of 2020 deals featured buyer equity as part of deal consideration, up from 13 percent in 2018 and 15 percent in 2019.
- Earnouts Favored Earnings vs. Revenue: The pandemic also influenced the structure of earnouts. Earnout periods for 2020 deals trended longer, with fewer deals having an earnout period of one year or less, and more of last two or three years. Additionally, deals used an “earnings/Ebitda” test, while fewer used “revenue” tests.
- The percentage of deals with a management carveout remained relatively low in 2020, at 6.7 percent; although, there was an increase in deals with 1-3x returns that did have a carveout.
- The rise of separate purchase price adjustment (PPA) escrows continued, with 68 percent of deals having this feature in 2020, up from 5 percent in 2019. The median size of those escrows was 0.7 percent of transaction value.