Private equity is pivoting away from distressed investments and de-levering transactions, according to BDO’s Spring Private Capital Pulse Survey. PE and venture capital respondents said they would direct capital toward new deals and bolt-on acquisitions at a greater rate than in the Fall. That could give an already robust dealmaking environment an added boost.

M&A is back. The first quarter’s $1.3 billion in deal value was the strongest first quarter on record according to Refinitiv, and private equity constituted a larger slice of that activity. Financial sponsors inked deals worth $249 billion. That’s double the figure from 1Q20. 

But where are funds planning to put capital to work? In addition to bread-and-butter acquisition strategies, financial sponsors are also planning to apply equity relief to portfolio companies at a slightly higher rate than they said in the Fall, at 23 percent vs. 19.5 percent. This move, and sponsors’ shrinking appetites for investing in distressed companies, could mark the return of PE interest in established growth companies. 

The structure of PE deals could also be in for a shift. In the greatest change in PE fund manager preferences, 43 percent said they would seek private investment in public equity (PIPE) deals going forward, up from 18 percent in the Fall. Sponsors are also showing increased appetite for structured credit and growth equity investments.

Funds looking to deploy capital still expect some headwinds in the second quarter. Surprisingly, securing debt to finance transactions is seen as one of the biggest risks to deal execution. Half of respondents indicated this factor as a potential concern, pointing to another reason that the oft-forecast mega-leveraged buyout has yet to reappear. Toshiba Corp.’s stalled $21 billion takeover approach from CVC Capital springs to mind.

A question unanswered by the survey, though, is why? Is the dearth of financing a sign of tougher underwriting standards, or evidence that deal valuations are getting too frothy?

Here there is at least a gesture toward the latter answer in the survey results. Over 90 percent of respondents anticipated higher asset prices in the next 6 months, just about evenly split between those who expected a naught to 9 percent increase and a more bullish contingent forecasting a 10 percent to 24 percent appreciation. Five percent even predicted assets could climb 25+ percent higher, perhaps placing themselves in the category of dealmakers most likely to find that their reach outstrips their financing. 

Risk exposure during due diligence remains another impediment, no doubt one made more difficult by remote work. And in another shift, 18 percent more private equity fund managers see competition from rivals as a larger risk to snagging deals than in the Fall. 

Get ready for fewer distressed plays, more PIPE and structured credit deals, and frothy price expectations reigned in — for now — by more discerning lenders.