All we have to do is look at our retirement accounts to know that a rising tide floats all boats, and 2021 was no exception. U.S. stocks finished a third consecutive year of big gains, with major indexes nearing performance records in 2021.
Even with the recent turbulence from the Omicron coronavirus variant, the S&P 500 saw a 27 percent advance for 2021, and hit 70 highs. It was the third straight year of double-digit gains for the broad index, and the second in the midst of the Covid-19 pandemic. The Dow Jones Industrial Average and Nasdaq Composite gained 19 percent and 22 percent, respectively, helping send the major indexes to their best three-year performance since 1999.
Despite the much-written-about inflation threat, and its corresponding upwards pressure on interest rates, both the public and private equity markets are poised to continue to advance in 2022. But it is the big world of private equity that is anticipating another enormous round of both capital raising and deployment of newly-minted funds into the private markets.
The construction products industry has never been a darling of private equity investing. Overall, there have only been a handful of private equity-funded mergers and acquisitions transactions compared to deals where multi-national construction materials juggernauts represent the vast majority of buyers of privately held companies in our industry, large and small.
But that is changing. A decade ago, calling on private equity firms to present them with construction materials companies for sale was a waste of time; they were focused on software transactions, big opportunities for rocket-high growth, and little appetite for money-eating capital expenditures that defines the economics of our industry. Plants and rolling stock wear out, with reinvesting in equipment commanding a large portion of the free cash flow our industry generates. But today, private equity is on a fundraising tear, taking advantage of the insatiable appetite institutional investors have for outsized returns these funds have historically generated. And for private equity sponsors, this represents a great way to generate big management fees; the 2 percent standard means even a very small fund raising $250 million to $500 million will collect $5 million to $10 million in fees annually for managing the fund, which goes a long way toward paying for lavish offices and those S-Class Mercedes-Benzes.
At the end of 2021, the big five private equity funds, which include Blackstone, KKR, Apollo, Carlyle, and Ares, managed nearly $2.25 trillion combined. These behemoths are continuing to scale by expanding existing product lines and launching new ones. There is a constant demand to deliver outperformance to equity holders by scaling management fees and revenues, all of which starts with ever-higher assets-under-management (AUM) figures. In order to hit $3 trillion by year-end 2022, they will have to lift AUM by just under 6 percent per quarter. And the newer trend of “continuation funds,” which offer investors liquidity earlier in a fund’s lifecycle but keep the assets under the manager’s tutelage, offer a new path, as a heavier usage of continuation vehicles may extend holding times and increase AUM. Fundraising for Blackstone, Apollo, and Carlyle is set to significantly boost AUM figures in 2022, likely over $80 billion between those three funds alone. Finally, doubling down on fundraising from insurance companies and the mass affluent will allow these mega-funds to accelerate their fundraising efforts.
As these funds pour newly raised money into investments across the entire spectrum of the economy, from technology to retail to mundane industrial manufacturers, they are looking behind more and more doors to find new opportunities, and concrete products and ready mixed producers are on their radar screen. We have already seen a significant increase in interest in the construction space by private equity, further fueled by the newly enacted infrastructure legislation combined with the herd mentality all of Wall Street seems to follow. Look for more activity from private equity in our industry in 2022 and beyond.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected] Follow him on Twitter – @allenvillere.