The Business Environment Q2 2021

Tom Martin, Matt Sweetser and Christine Hourihan provide an overview of the business environment on three fronts: the overall economy, the credit markets and the private equity and mergers and acquisitions markets.

In each quarter’s issue of Owner to Owner, we review aspects of the business environment on three fronts: the overall economy, the credit markets and the private equity (PE) and mergers and acquisitions (M&A) markets. The following article addresses positive indicators for economic performance in 2021, trends in commercial and industrial (C&I) loan issuance and standards and the healthy PE environment.

The Economy

The U.S. economy has regained its footing and appears poised for significant growth in 2021. Our optimism stems from the triple tailwinds of healthy household finances, easy monetary policy and expansionary fiscal policy meeting a country that is emerging from the COVID-19 pandemic. After a record quarter in the third quarter of 2020, the economy posted solid gains of 4.3% in the fourth quarter and 6.4% in the first quarter of 2021. Looking ahead, the Atlanta Federal Reserve’s GDPNow estimate of second quarter GDP growth stands at 11.0% as of May 7. With GDP less than 1% off its fourth quarter 2019 high, the second quarter is likely to erase all remaining losses from the pandemic and put economic output at a new all-time high.

Various economic indicators also corroborate this optimistic view of growth. Vehicle sales and lumber prices, for example, are in a historic boom and are both emblematic of the strength of the U.S. consumer. In April a seasonally adjusted rate of 18.5 million new cars were sold, the strongest month since July 2005. New housing starts are at their highest level since 2006, and accordingly, lumber prices are off the charts. Lumber futures contracts, which traded at $495 before the pandemic, now stand at $1,670.1

While many businesses have suffered as a result of the pandemic, much of this distress is centered on a handful of industries at the epicenter of crisis, and the U.S. corporate sector on the whole is strong. 2020 saw a wave of bankruptcies, though aggressive policy actions helped stave off the worst. As seen in the nearby table, a relatively small number of industries representing only 12% of the private sector saw output declines greater than 10% over the full year in 2020. All other industries were either down modestly or had already surpassed their pre-pandemic peak in output by the end of last year. Today, the corporate sector is well capitalized, and bankruptcies have returned to normal levels. Using the S&P Composite 1500, an index composed of small-, mid- and large-capitalization U.S. stocks, as a barometer, corporate earnings also appear strong. With the majority of the index reporting, first quarter 2021 operating earnings are expected to be up 27% over the two years since first quarter 2019.2 Similarly, estimates call for full-year 2021 earnings to grow 21% vs. 2019.  

U.S. GDP: Real Gross Output by Industry
Industry % of Private Industry Output
(Q4 2019)
% Change from
Q4 2019 to Q4 2020
Information 6.5% 3.8%
Construction 4.5% 3.0%
Agriculture, forestry, fishing and hunting 1.7% 2.9%
Retail trade 5.9% 2.1%
Finance, insurance, real estate, rental and leasing 19.4% 1.9%
Manufacturing 20.2% 0.5%
Wholesale trade 5.9% 0.4%
Professional and business services 12.9% -1.6%
Utilities 1.5% -1.9%
Educational services, healthcare and social assistance 8.7% -3.2%
Transportation and warehousing 4.0% -12.1%
Other services, except government 2.1% -15.6%
Mining 2.4% -19.3%
Arts, entertainment, recreation, accommodation and food services 4.3% -26.1%
Total 100%  
Source: Bureau of Economic Analysis.

The most noticeable piece of evidence that stands in contrast to all this positive data is the April employment situation report. While estimates called for nonfarm payroll gains of 1 million, a much lesser 266,000 jobs were added during the month, prior months were revised down by 87,000, and the unemployment rate ticked up by 0.1% to 6.1%. Although the Job Openings and Labor Turnover Survey (JOLTS) shows that job openings have surged to a record 8.1 million, employers are still having difficulty hiring workers. Companies have cited hiring problems related to ongoing fears of COVID-19, childcare responsibilities and generous unemployment benefits.3 Others cite the global semiconductor shortage holding back the manufacturing sector and the ongoing shipping logjams at many U.S. ports as other factors causing volatility in labor markets. While we suspect that in some regards this weak report may prove to be a fluke, the next few months of data will confirm this.

Inflation is the other topic captivating markets these days – and one that certainly bears watching. Given the unprecedented amount of monetary and fiscal stimulus, as well as the recent surge in certain commodity prices, many forecasters are convinced that this will spill over and cause a sustained rise in consumer prices. While year-over-year headline inflation figures will certainly experience a temporary spike as we anniversary the COVID-19-induced price declines of 2020, it is much less clear what kind of rise to expect in core inflation (excluding food and energy). The April Consumer Price Index (CPI), however, gave some indication that inflation has surged beyond what was expected from a simple cyclical rebound. Headline CPI rose 4.2% over the past year vs. expectations of 3.6%, and even Core CPI (excluding food and energy) rose 3.0% vs. expectations of 3.2%. Inflation now has the market’s attention, and we will watch closely for further signs of a sustained rise in core inflation.

The Credit Market

The existing accommodative monetary policy centers around near-zero short-term interest rates and quantitative easing involving the Federal Reserve buying more than $120 billion of Treasury and mortgage bonds monthly. Following its meeting on March 16 and 17, the Fed issued a statement noting the bond-buying programs will continue “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.” Although first quarter 2021 economic data generally showed progress against fourth quarter 2020, with further improvement expected through the summer, the U.S. job market still trails its pre-pandemic level, and inflation persistently has run below the Fed’s 2% longer-run goal. As such, following the conclusion of the Federal Open Market Committee (FOMC) meeting on April 28, the Fed issued a statement noting it “expects to maintain an accommodative stance of monetary policy” until its maximum employment and longer-run inflation target are achieved. It is important to note that with inflation consistently trailing the 2% longer-run goal, the Fed will aim to achieve inflation moderately above 2% for some time to reach the longer-run target.

Date 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y
4/29/2021 0.00003 0.00009 0.00028 0.00046 0.00165 0.00342 0.00871 0.01333 0.01648 0.02316
3/31/2021 0.00004 0.00018 0.00033 0.00058 0.00162 0.00348 0.0094 0.01421 0.01742 0.02413
12/31/2020 0.00043 0.00072 0.00085 0.00107 0.00122 0.00166 0.00362 0.00646 0.00916 0.01646
9/30/2020 0.00075 0.00097 0.00104 0.00118 0.00129 0.00158 0.00278 0.00472 0.00685 0.01457
6/30/2020 0.0012 0.00139 0.0016 0.00154 0.0015 0.00174 0.00289 0.00492 0.00657 0.01412
Data as of April 29, 2021.
Source: Bloomberg.

At this time, the consensus among Federal Reserve officials is that short-duration interest rates will remain unchanged through 2023. When to ultimately tighten monetary policy presents an interesting dilemma for the Fed. Acting too soon (or hinting at such) can cause a sudden rise in borrowing costs, straining economic growth. Waiting too long to act (or hinting at such) can allow inflationary pressures to build. Federal Reserve Chairman Jerome Powell plans to minimize such volatility by giving investors plenty of notice before enacting any changes to its bond-buying plans. Any cuts to the purchases would likely precede the first interest rate increase.

Corporate spreads provide information on how the market values risk and credit quality through the additional return required for providing capital to incrementally riskier borrowers. As shown in the nearby chart, at the onset of the COVID-19 pandemic in March 2020, spreads for high-yield bonds (CCC-rated and below) peaked at over 10%, levels not seen since the Great Recession. The premium required to hold riskier high-yield issuances over A-rated bonds (deemed safest) peaked at 8.3% in March 2020 due to uncertainty related to the pandemic. However, this premium generally declined throughout the remainder of 2020 as a result of quick monetary and fiscal policy responses, ending the year at 2.6%. It has further declined in 2021 owing to continued accommodative monetary policy and fiscal stimulus coupled with a recovering economy, amounting to 1.7% as of the end of April 2021 – a premium low not seen since July 2014.

Chart displaying corporate spreads by quality (A, BBB and high yield) from 2009 through April 28, 2021. If you are in need of the data found in this graph, please contact

The nearby graph shows C&I lending to companies overlaid by the net percentage of U.S. banks tightening or loosening credit standards for C&I loans to large and middle-market firms. The net percentage data is based on the Fed’s first quarter “Senior Loan Officer Opinion Survey on Bank Lending Practices.” The trend of domestic banks increasing lending standards (instead of loosening them) persists, although the degree of which has steadily declined over the past two quarters, suggesting domestic C&I lending is approaching more of a borrower-friendly environment. The figure was 71% as of third quarter 2020, 38% as of fourth quarter 2020 and 6% as of first quarter 2021.

Chart displaying fluctuation in C&I loan issuance and tightening bank standards from 2008 to 2021. If you are in need of the data found in this graph, please contact

A strong majority of banks that reported tightening standards or terms on C&I loans cited three key reasons for doing so: a less favorable or more uncertain economic outlook, worsening of industry-specific problems and reduced tolerance for risk. Although a small majority of banks reported weaker demand for C&I loans to firms of all sizes, banks reported that inbound inquiries from potential borrowers about the availability and terms of new credit lines or increases in existing lines essentially remained unchanged from the prior quarter. Conversely, a small majority of foreign banks reported that both demand and inquiries compared favorably to the prior quarter.

The Private Equity and Mergers and Acquisitions Markets

While the 2020 market environment was quite volatile, private equity showed resilience in the face of strong headwinds. Fund managers quickly learned that their and their portfolio companies’ survival depended on their ability to swiftly adapt to the rapidly changing landscape. As the COVID-19 vaccination rollout continues, PE fund managers will once again need to pivot in order to adjust to another new normal. While a number of uncertainties remain, managers have entered 2021 with cautious optimism.

2021 U.S. PE deal making seems to have normalized after a turbulent 2020. First quarter 2021 deal activity of 1,763 deals worth $203 billion represented a decline from the high level of activity in fourth quarter 2020. However, these numbers represent a healthy deal-making environment, which is expected to continue due to pent-up demand. The potential hikes in personal and corporate tax rates have also spurned deal flow, as many business owners are looking to sell before these increases would take effect.4

Year Deal Value ($B) Deal Count
2010 $279.30 2,756
2011 $339.10 3,106
2012 $375.50 3,535
2013 $433.20 3,376
2014 $528.10 4,223
2015 $498.90 4,410
2016 $597.00 4,482
2017 $641.40 4,905
2018 $742.90 5,639
2019 $763.70 5,585
2020 $724.20 5,789
2021 $203.00 1,763
As of March 31, 2021.
Source: PitchBook.

While PE exit activity was on pace to hit a 10-year low as of third quarter 2020, the fourth quarter had a record-breaking rebound, and exit activity remained robust through the first quarter of 2021, when U.S. PE firms exited 289 portfolio companies worth $162 billion.5 One reason for the healthy exit environment can be attributed to the range of exit options, including via special purpose acquisition companies (SPACs), also known as blank-check companies. While SPACs have become red hot over the past year, more SPAC IPOs priced in first quarter 2021 than all of 2020.6 PE firms have used SPACs as an avenue for exiting their portfolio companies, and about half of companies purchased by SPACs last year were owned by PE firms.7 Conversely, SPACs have also increased competition for deals in an already frothy market. It should be noted, however, that the number of SPACs entering the market dropped dramatically at the end of first quarter 2021.

Year Exit Value ($B) Exit Count
2010 $212.50 851
2011 $252.20 920
2012 $289.80 1,133
2013 $329.60 1,053
2014 $423.30 1,323
2015 $394.40 1,370
2016 $369.10 1,293
2017 $415.40 1,319
2018 $450.70 1,350
2019 $356.40 1,117
2020 $391.90 1,002
2021 $162.00 289
As of March 31, 2021.
Source: PitchBook.

Year Capital Raised ($B) IPO Count
2011 $0.40 7
2012 $0.20 6
2013 $0.30 2
2014 $1.10 10
2015 $2.00 13
2016 $1.50 8
2017 $5.80 24
2018 $9.10 43
2019 $12.00 59
2020 $75.80 249
2021 $87.70 300
As of March 31, 2021.
Source: PitchBook.

First quarter U.S. PE fundraising rebounded after a lackluster 2020. In total, 97 U.S. PE funds closed with a total of $88.5 billion.8 This pace will likely continue as limited partners grow increasingly more comfortable traveling to conduct due diligence in addition to their newfound comfort with conducting due diligence virtually. In an S&P Global Market Intelligence Survey, about 53% of respondents expected improved fundraising conditions in 2021, with 32% expecting the fundraising outlook to be about the same, and only 15% predicting it would worsen.

Year Capital Raised ($B) Fund Count
2010 $56.30 145
2011 $71.50 184
2012 $106.10 218
2013 $160.20 304
2014 $177.80 399
2015 $159.10 394
2016 $224.20 420
2017 $271.60 482
2018 $206.40 413
2019 $322.20 448
2020 $213.00 289
2021 $88.50 97
As of March 31, 2021.
Source: PitchBook.

The M&A market proved to be resilient through 2020. Compared to 2019, total M&A value and volume dropped 21% and 15%, respectively. However, the majority of the depressed activity was seen in the first half of the year. The second half of the year experienced a major uptick in deal activity, and total value during this time actually topped pre-pandemic levels. While uncertainty abounds, there are also a number of tailwinds in the market: Stock markets are at an all-time high, interest rates remain low, and GDP is poised for growth.9 Among U.S. executives surveyed, 53% said their companies planned to increase M&A investment in 2021.10

Year Deal Value ($B) Deal Count
2010 $894.60 7,800
2011 $1,030.40 8,882
2012 $1,186.20 9,976
2013 $1,108.00 9,315
2014 $1,584.00 11,690
2015 $1,875.00 12,622
2016 $2,017.20 11,576
2017 $1,799.50 11,678
2018 $2,168.70 12,339
2019 $1,990.30 11,583
2020 $1,554.90 10,956
As of March 31, 2021.
Source: PitchBook.

COVID-19 has also accelerated the importance of environmental, social and governance (ESG) considerations in both PE and M&A. The pandemic magnified a number of problematic societal issues rendering ESG considerations the right thing to do. According to Bain & Company’s 2021 Global M&A Report, “the year 2020 will be remembered as the one in which ESG assumed a prominent place among M&A criteria.” ESG considerations have gone from a “nice to have” to common practice. General partners have become more accountable to their shareholders and to their own employees. In addition to being good corporate citizens, firms have come to realize that incorporating ESG into due diligence can often translate into long-term success and value creation.


Overall, the U.S. economy appears poised for significant growth this year, thanks to healthy household finances, easy monetary policy and expansionary fiscal policy meeting a country that is emerging from the COVID-19 pandemic. Still, we will remain watchful of the next few months of employment data to make sure the April report was just a fluke. In the credit markets, a trend of domestic banks increasing lending standards has emerged over the past year. However, a slowdown in the pace with which this is happening over the past two quarters suggests a more borrower-friendly domestic environment may be on the horizon. Finally, in the PE market, fund managers have entered the year with cautious optimism following a turbulent 2020, with the deal-making environment healthy, exit activity robust and a fundraising activity rebound.


Up Next
Up Next

Juggling Competing Priorities as a Private Business Owner

Growth, liquidity and control are all interests core to private business owners, but they don’t always align. In the feature article of this issue, we speak with Rob Lachenauer, Managing Partner of BanyanGlobal, and Ben Persofsky, Executive Director of the BBH Center for Family Business, about the complications that arise around these strategic decisions when there are multiple owners with different priorities and how private business owners can best manage these competing interests.

1 CME Group.
2 S&P Dow Jones Indices.
3 Bloomberg.
4 PitchBook.
5 Ibid.
6 Ibid.
7 Institutional Investor.
8 PitchBook.
9 “Against all odds: US M&A 2020.” White & Case.
10 “PwC US Pulse Survey.” PricewaterhouseCoopers. November 2020.

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