Onshoring supply chains. Complex supply chains and upside pressure on raw material pricing have sent corporate leaders and policymakers back to the drawing board to ensure redundant supply for components and materials. The technology industry, in particular, has become acutely aware of the dependency on hot spots in Asia for specialty components. Additional localized US domestic production is expected to accelerate to meet the demand for new primary or secondary suppliers.
Companies are staying private longer. By remaining private, companies enjoy a window during which they take strategic steps with a longer-term focus on growth and sustainability. Private equity dry powder plays a vital role in these changes, especially as they bring an experienced playbook in order to make bold and deeper adjustments. We anticipate that the more than 200,000 companies within the US Middle Market will continue to use this advantage to gain market share.
The retreating distressed market. Forecasts for a robust distressed debt market in 2021 have evaporated. Classic asset-rich reorganization opportunities did not materialize to the extent expected due in large part to successful policy coordination. Credit levels remain high, and servicing still relies on the continuation of low rates. That said, the bankruptcy of Katerra, a disruptive construction tech startup, added to the growing number of venture-backed deals heading for protection.
Softbank’s Vision Fund, an investor in Katerra, found itself in trouble as the company faced delays and cost overruns. The road to becoming a venture darling offers many detours and off-ramps for the majority that fail to reach the exponential growth required to continue venture funding. Bankruptcy can often be averted if a loyal customer base has been established and attractive growth opportunities are still in sight. In this case, the opportunity is ripe for new investors, such as Small Buyout managers, to step in and clean up the disparate and dissatisfied investor base while steering towards new strategic goals with less ‘burn’.
Return of the mega-deal. This quarter marked the largest leveraged buyout in a decade. Medical supply company Medline was acquired by a consortium that included Blackstone, Carlyle and Hellman & Friedman for more than $30 billion. This is also an example of friendly competitors collaborating to transact at bigger deal sizes. Blackstone and Starwood teamed up to purchase Extended Stay America, a hospitality company and REIT for approximately $6 billion. The continuation of inexpensive financing markets and significant dry powder presages more mega deals to come.
Commodity price instability. We expect pricing pressure will lead to a greater focus on efficient and sustainable practices to manage scarce resources. Gyrations in lumber, iron ore, crude oil and copper prices are expected to translate into margin volatility and stimulate innovation in industrial processes. The ongoing shortages and price spikes may worsen as a result of the proposed infrastructure legislation. There is increasing skepticism about whether these inflationary pressures will be transitory or ultimately put upward pressure on rates.
Labor and corporate migration. The surge in work-from-home allowed families and companies to rethink their office configurations. Inbound migration to states like Texas and Florida has expanded centers of excellence across sectors. In combination with global corporate tax harmonization, the mobility of both talent and companies is uprooting corporate footprints. The second-order effects are just starting to be felt and will cause further shifts in demand for services and infrastructure.