Private Equity Firms Expect Wave of M&As in Second Half of 2021

KEY TAKEAWAYS

Deal volumes and valuations are expected to pick up.
Firms expect more sellers will be open to making deals in the third and fourth quarters.
Interest in international deals continues to decline.

Despite ongoing challenges from the economic turmoil of COVID-19, private equity (PE) firms expect to see a wave of merger and acquisition (M&A) activity during the second half of the year, spurred by a waning pandemic and the specter of higher capital gains taxes, according to a survey from Citizens Financial Group.

The survey polled 470 US-based middle-market firms with $50 million to $1 billion in revenue that are currently engaged in, or are open to M&A activity, as well as 230 private equity firms with clients in the same revenue range. Core business sectors included health care, technology, industrial, consumer services, and business-to-business (B2B) services, among other industries.

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“Many business leaders expect the continued rollout of vaccines and the prospect of increased taxes to spur a robust year in terms of deal flow, especially in the second half,” Ralph Della Ratta, chairman of Citizens M&A Advisory, said in a statement.

According to the survey, companies will rely on mergers and acquisitions for growth in 2021 and more sellers will be open to making deals during the third and fourth quarters.

While economic outlook is usually the main factor in a company considering an M&A transaction, the survey found that COVID-19 and the Biden administration’s tax policies are top drivers for firms this year, with increased expectations for a surge in M&A if the capital gains tax rate is hiked. Optimistic expectations for corporate valuations and deal flow this year are also contributing to a rosy M&A outlook.

Expectations for robust M&A activity come despite firms having a less positive outlook for the US economy for the year. Only 47% of firms polled said they have a positive outlook for the economy in 2021, compared with 61% of firms who said the same thing in 2020. The companies had a more positive outlook for their own businesses in 2021 with 55% saying they were optimistic about their outlook this year, although that was down from 65% last year.

“2020 left a backlog of pent-up demand for M&As,” said Jim Childs, CEO of Citizens M&A Advisory. “With strong valuations, we think a lot of PE firms and liquidity-seeking owners will be eager to get to the market.”

The survey also found that interest among firms to conduct international deals continues to wane as only 47% of buyers and 33% of sellers said they were interested in global M&A deals, down from 51% and 41%, respectively, last year, and 56% and 49%, respectively, in 2019. Citizens Financial said that because international deals are inherently more complicated, the continued decline in sellers’ interest is a sign they are looking for execution certainty.

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Tags: Citizens Financial Group, Coronavirus, COVID-19, Jim Childs, M&A, middle market, Pandemic, Private Equity, Ralph Della Ratta

Three men affiliated with New York-based alternative asset management firm GPB Capital Holdings, including its founder and CEO, have been charged with securities fraud, wire fraud, and conspiracy as part of a scheme to defraud investors.

According to an indictment unsealed in the Eastern District of New York, David Gentile, the founder and CEO of GPB; Jeffrey Lash, a former managing partner of GPB; and Jeffry Schneider, the owner and CEO of Ascendant Capital, allegedly misrepresented the source of funds used to make monthly distribution payments to investors, as well as the amount of revenue generated by two of GPB’s investment funds. If convicted, each of the three men faces up to 20 years in prison.

GPB, which Gentile founded in 2013, served as the general partner of several investment funds, including GPB Holdings, GPB Holdings II, GPB Automotive Portfolio, GPB Waste Management, and GPB Cold Storage, and raised and invested capital in a portfolio of private equity investments.

Gentile and Schneider worked together running GPB’s funds, according to the indictment, which noted that GPB funds maintained such a close operational relationship with Ascendant that executives at each firm considered the two firms to function as one company. And Lash was responsible for overseeing the GPB funds’ investments in car dealerships, which made up a significant portion of GPB’s portfolio companies.

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The indictment said the alleged material misrepresentations and omissions made by the men induced people to invest their capital in certain funds based on the understanding that the funds would continue to use investor money to acquire mature, profitable companies that were already generating enough cash flow to pay the investors’ monthly distributions.

The court documents said investors were led to believe that they would receive monthly liquidity in the form of distribution payments, and that the payments would not diminish the value of their invested capital, which would remain invested in the portfolio companies. In reality, according to the indictment, the portfolio companies frequently underperformed expectations, the monthly distribution payments largely came from investor capital, and the monthly distribution payments were suspended in December 2018.

“The vast majority of investors in the GPB funds have been unable to obtain any liquidity from their investments since that time,” according to the indictment.

The GPB funds mainly raised capital through Ascendant, whose employees pitched registered brokers and registered investment advisers (RIAs) to get their individual investor clients to invest in GPB funds. Ascendant also organized due diligence seminars where brokers and investment advisers could get information about the GPB funds and meet with Gentile and other GPB funds representatives. GPB funds were touted as a “rare opportunity” to invest in private equity, which is typically only available to institutional investors, according to the indictment.

“As alleged, the defendants misrepresented the holdings of GPB Capital through deceptive marketing practices, luring investors with promises of monthly distributions that would be covered by funds from the investments and not drawn from underlying invested capital,” William Sweeney Jr., assistant director-in-charge of the FBI’s New York field office, said in a statement. “In truth, a significant portion of GPB’s distributions were paid directly from investor funds.”