Private equity deal activity is moving at a scorching pace.

Driven by strong investor interest in business products and especially technology, PE deals are being completed at the fastest clip in at least 20 years, according to our latest Quantitative Perspectives Report.

Following pent-up demand from a cautious 2020 driven by COVID-19 uncertainty, PE deals were expected to climb—but the pace has been faster than anyone could have predicted, said Andrew Akers, a quantitative research analyst at PitchBook.

"The other, more significant, part of the story is that demand recovered extremely quickly, brightening the outlook for many businesses at the same time extraordinary loose monetary policies created a wave of liquidity," he said.

Not only has more money flowed directly to PE firms to invest, but firms have also benefited from an ample supply of credit from banks and other private investors to support buyout deals.

However, it is unlikely that the recent pace of dealmaking can be sustained for much longer.

First, PE firms would likely run out of capital to invest unless collective fundraising efforts picked up substantially.

"If the current pace of dealmaking over the last six months continued for a full year, the aggregate deal value would be greater than the current dry powder of all funds," Akers said.

Second, economic conditions appear to be shifting, which may hamper dealmaking. In response to the highest inflation rate in 30 years, the Federal Reserve has signaled it will begin raising interest rates in 2022.

"Higher interest rates will likely reduce investor's appetite for risky assets and the supply of credit to support buyout deals," Akers explained.

While PE interest in technology has seen an unprecedented boom, the energy sector received lackluster investment over the past seven years. But that could be poised to change.

"This decline accelerated during the pandemic as oil prices were hit even harder as demand for shipping and travel plummeted. However, the recent increases in oil prices are one reason to expect a possible bounce back in dealmaking," Akers said.

Featured image by twomeows/Getty Images

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