PE deals surge as higher US capital gains tax looms; PE SPAC involvement grows

S&P Global Market Intelligence offers our top picks of global private equity news stories and more published throughout the week.

The Biden administration's proposal to hike capital gains tax has spurred a flurry of private equity M&A as privately held companies have extra motivation to sell.

Privately held companies need a triggering event to push them to start a sale process or to respond to buyout offers, and "tax changes are probably one of the biggest triggers that exist," ClearRidge Managing Director Matthew Bristow said. This, in turn, has thrown up opportunities for deal-hungry private equity firms with dry powder to deploy.

Additionally, general partners that had put off exiting their investments in the months following the coronavirus outbreak are heading out to market to sell their holdings, and the potential tax increase could shorten timelines. Year-to-Aug. 31, the number of all-cash transactions involving U.S.-based private equity sellers and target companies soared 89.3% to 301 compared to the same period in 2020, according to S&P Global Market Intelligence data. The number of stock deals over the same period also rose 63.6% year over year.

Under the proposal, the capital gains tax would increase to 39.6% from the current rate of 20%, or to 43.4% from 23.8% if the net investment income tax is taken into account.

The new rate could be retroactive to April 28, when President Joe Biden first announced the proposed tax hike as part of his American Families Plan, or to May 28, when the U.S. Treasury Department released the administration's Fiscal Year 2022 Budget Tax Proposals. If retroactively instated, deals closed after such date would result in investors realizing gains at the new rates instead of the previous, lower rates.

If and when a tax hike goes into effect, "sellers could be less likely to sell their business due to the reduction in their after-tax proceeds, and as a result, buyers will have fewer opportunities to acquire companies," said Brian McNeely, a partner at Reagan Consulting Inc.

Despite the potential for a near-doubling of capital gains tax, Bristow and McNeely both believe that the private equity playbook of seeking assets that maximize investor returns is likely to remain the same over the next year.

Read more about U.S. private equity M&A activity across 2021 and the potential effects of the proposed increase to capital gains tax here.

CHART OF THE WEEK: On the bandwagon

➤ Of the 493 SPAC IPOs recorded so far in 2021, 80 are backed by private equity/venture capital firms with an ownership interest of at least 5%, according to Market Intelligence data. In all of 2020, there were 44 such IPOs out of 304 total SPAC offerings.

➤ Prominent private equity firms such as Blackstone Inc., Apollo Global Management Inc., KKR & Co. Inc., Fortress Investment Group LLC, TPG Capital LP and Warburg Pincus LLC have been behind some of the most notable SPACs launched in the last two years.

➤ Two of the top five private equity-backed SPACs in terms of market capitalization count Las Vegas-based Trasimene Capital Management LLC, which was founded only two years ago, as their biggest stakeholder.

FUNDRAISING AND DEALS

* Blackstone Inc. will purchase The Chamberlain Group Inc. from The Duchossois Group Inc., which will continue to own a stake in the smart access solutions provider, at a valuation of about $5 billion.

* An entity controlled by funds managed by Apollo Global Management Inc. affiliates completed the cash tender offer to buy all of The New Home Co. Inc.'s outstanding common shares.

* Silver Lake Management LLC will invest in British breakdown assistance company RAC Group Ltd. in a deal scheduled to close in the late fourth quarter.

* Thoma Bravo LP agreed to make a strategic growth investment in Intel 471 Inc., while the cyber threat intelligence company's co-founders, Mark Arena and Jason Passwaters, will keep a significant ownership stake in the business.

ELSEWHERE IN THE INDUSTRY

* H.I.G. Capital LLC drummed up €2 billion for the H.I.G. Europe Middle Market LBO Fund LP.

* AnaCap Financial Partners will make a majority investment in WebID Solutions GmbH, alongside the German digital identification provider's founders and management team.

* Sagard Private Equity Canada acquired Groupe Lou-Tec Inc., a Canadian heavy machinery and equipment rental company, in partnership with Walter Capital Partners, Investissement Québec and BDC Capital Inc.

* Invision AG will purchase Reichelt Elektronik GmbH & Co. KG, together with the German e-commerce company's management, from Dätwyler Holding AG.

FOCUS ON: INTERNET SOFTWARE AND SERVICES

* Blackstone will deploy capital into Dynamo Software Inc., which values the company at roughly $900 million, while Francisco Partners Management LP will reinvest in the business, Dow Jones reported, citing people familiar with the matter.

* Thoma Bravo will purchase customer survey software company Medallia Inc. from Sequoia Capital Operations LLC in a deal expected to close in 2021.

* Cinven Ltd. agreed to take a majority stake in U.K. financial services company True Potential LLP.