Antares launched 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 levels, despite some lingering financial stress in some areas.
2021 Will See Strong Economic Rebounds
Despite market uncertainty at the height of the pandemic, positive economic sentiments have sharply rebounded in 2021. 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 report 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,” said David Brackett, chief executive officer of Antares Capital. “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.”
New External Business Challenges Emerge for Borrowers
Borrowers see new business challenges emerging in 2021. Covid-related restrictions, lingering challenges to the supply chain and raw material cost increases were the highest 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.
Widespread Middle Market Resiliency
Survey results highlight 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 suggests a significant uptick of investors expect leveraged loan volume to rise this year, with 74% predicting volumes to increase in 2021 compared to only 19% in 2020.
Interestingly, the survey suggested higher demands from private equity sponsors selling portfolio companies to a SPAC rather than raising money for such a company. Findings suggest 60% of private equity sponsors might sell their portfolio company to a SPAC, while a lesser 20% said they might raise funds to establish one.
Deal Activity and M&A Expectations on the Rise
Most sponsors and investors expect M&A activity to pick up in 2021, with about 2/3rds expecting upticks in LBO’s 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 to a reported 21% in 2020.
“Today’s middle market features favorable conditions for private equity transactions,” said Brackett. “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.”
The full survey results, including additional analysis and survey methodology, is available here.
Antares Compass provides a holistic view of the health and outlook of the middle market. It combines insights from a fundamental set of 100+ middle market participants and spans several industries and end markets. Participant groups include middle market companies, private equity sponsors, and investors that identify as a bank, BDC, CLO, insurance company, mutual fund, or non-bank leader.