A shift is underway in dealmaking. Aggregate PE deal value was down in the first quarter, but there are a couple of notably exceptions. The materials and consumer sectors defied gravity in the past quarter to top 1Q21 highs in terms of both deal value and volume. That could mean financial sponsors are picking their spots in a market increasingly roiled by inflation and geopolitical tensions.

Materials’ share of private equity deal volume rose to 13 percent in 1Q22, according to a recent EY private equity pulse report, as investors sought safety in inflation-proof commodities. It’s a modest bump from the previous year’s 10 percent, but came alongside an increase in sector deal value to become one of the rare sectors with a rise in both aggregate deal value and volume. Consumer was the only other industry group to share that crown, representing a surprising 24 percent of 1Q22 deal volume and 17 percent of deal value.

That’s a story that’s being told across the middle market. Middle-market consumer sector companies are leading earnings and revenue growth in the first quarter, according to a Golub Capital analysis of portfolio companies to which it has lent. The average consumer sector company in its universe posted 1Q revenue gains of over 20 percent and earnings gains of over 14 percent. The ability to pass cost increases through to consumers could make the sector an attractive investment space.

The two sectors’ outperformance comes alongside a secular fall in PE dealmaking. S&P Global Market Intelligence puts worldwide PE deal value at $239 billion at the end of last quarter, down from yesteryear’s $290 billion. The slump in deal value is somewhat obscured by the increase in transactions. Sponsors inked 6,299 acquisitions compared to the 5,856 posted in 2021, indicating a drift lower in valuations.

Brandon Zero