Antares Capital released its fifth annual outlook survey, Compass 2021, presenting analysis of perspectives on the middle market from portfolio companies, private equity sponsors and investors. The report suggests confidence in the U.S. economy and private markets has returned to pre-COVID-19 levels despite some lingering financial stress in some areas.
Despite market uncertainty at the height of the pandemic, positive economic sentiments have sharply rebounded in 2021. According to the survey, 59% of sponsors and 74% of investors are confident in the global economy over the next 12 months, up dramatically from 24% and 55% for the same groups, respectively, in 2020. Participants also reported 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,” David Brackett, CEO of Antares Capital, said. “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.”
Despite the optimism, borrowers still see new business challenges emerging in 2021. COVID-19-related restrictions, lingering challenges to the supply chain and raw material cost increases were the highest ranked expected business challenges for the year. Industry headwinds and geopolitical risks, typically seen as highly problematic external business factors, ranked lower on the list than in years prior.
The survey also highlighted 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 suggested a significant uptick of investors expecting leveraged loan volume to rise this year, with 74% predicting volumes to increase in 2021 compared with only 19% in 2020.
The survey also suggested there will be higher demand from private equity sponsors selling portfolio companies to a SPAC rather than raising money for such a company. According to the survey, 60% of private equity sponsors might sell their portfolio company to a SPAC, while 20% 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 LBOs 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% expecting higher exits compared with a reported 21% in 2020.
“Today’s middle market features favorable conditions for private equity transactions,” Brackett said. “Survey participants are eager to deploy dry powder. We continue to expect higher than average capital market liquidity leading to significant deal-making in the near-term.”