Private Equity Remains Resilient In The Face Of Pandemic-Induced VolatilityJacob Wolinsky
Published today, 2021 Global Private Equity Outlook, a report produced by global law firm Dechert LLP in association with Mergermarket, finds that private equity (PE) funds still have plenty of dry powder to invest and are far more agile and less risk averse than their corporate counterparts.
Key findings of the report, which examines how PE firms continue to successfully navigate unprecedented market volatility, include:
- PE Industry Resilience – While the COVID-19 pandemic has caused widespread disruption across the global economy, the effect of the first wave on the private equity industry proved short-lived. After a short, sharp shock going into Q2 and many auction processes knocked off course, the sector rebounded impressively with total buyout activity in Q3 reaching US$148bn, exceeding levels in 2019 by 10%. The industry’s resilience and ability to bounce back so rapidly should be a cause for optimism through the current wave of the pandemic alongside record sums of dry powder.
- Private Credit – Private credit continues to grow in popularity, with 35% of firms having increased their use of these loans in the past 3 years, and almost half (49%) now using private credit as much as traditional bank financing in their buyouts. Greater flexibility on financing terms and ease of execution were cited as top benefits of this type of deal financing.
- U.S. Election – While 58% of respondents believed a would-be second term for President Trump combined with Republican congressional control would have the most positive impact on the PE market, a clear electoral result for President Elect Joe Biden also is a relief for dealmakers.
- Carve-outs – Carve-out activity looks set to spike, with 60% of respondents forecasting an increase in the number of carve-outs targeted by their firm. With current economic headwinds putting earnings under pressure, 33% of GPs cited corporates’ need to pay down debt as the primary driver of this trend, with 21% pointing to a desire to conserve liquidity. Carve-outs are also a useful strategy for PE houses themselves— with 17% planning on carving out units of portfolio companies.
- Getting Creative – 2020’s challenging conditions have seen firms get creative across a range of deal types, with many options set to remain popular heading into 2021. 98% of respondents were likely to consider partnerships with strategic buyers, whereas distressed deals were being weighed up by 87% of firms. Structured equity investments also remain attractive, offering GPs flexibility, greater security and limiting downside risk.
- Trade – Geopolitical concerns loom large for firms, particularly in Asia-Pacific. A quarter of APAC respondents cited the US-China trade conflict as the single greatest issue for the deal environment over the next 12-18 months, greater even than the COVID-19 pandemic. Beyond the trade war, new foreign investment rules set by countries including India, Japan and Australia look set to add new dimensions to trade considerations in the APAC region. Notwithstanding, Asia-Pacific saw an impressive 13% increase in buyouts compared to 2019.
U.S. and Germany-based Dr. Markus P. Bolsinger, co-head of Dechert’s private equity practice, says, “GPs spent much of March through to June in 2020 in crisis management of their portfolios, making sure their businesses had sufficient capital, because people were initially fearing a potential capital crunch. However, once they put their houses in order and ensured that their portfolios were on a firm footing, things have returned to some degree of normality, especially on the transaction side. Funds are very active again. There was a shock, but it appears to have been relatively short-lived.”
UK-based PE partner Ross Allardice comments, “From a European perspective, in the second half of 2020, we have seen a strong appetite for healthcare and tech assets. Some European Governments’ actions to lock down early, along with aid schemes have helped soften the economic blow of the pandemic to some degree and enabled certain sectors such as healthcare and tech to cope with the economic disruption. Our view is that the European buyout market has held up well so far. While major uncertainties and challenges remain, we anticipate that the private equity ownership model will prove its value across certain sectors in this crisis.”
Singapore-based PE partner Siew Kam Boon adds, “The Asia-Pacific region has been an outlier in terms of PE performance this year, with a well-managed and robust pandemic response across many nations resulting in a significant uptick in buyout activity compared to 2019. The top sector by considerable distance was TMT, followed by pharma, medical and biotech and this is expected to continue being the case through 2021, with a number of these being in the distressed and in the corporate carve-out space. There will also continue to be a push to expand into impact investments and growth investments for a number of the Asian sponsors.”
For private market fund managers, the mixed signals of an economic retraction and highly bifurcated market have presented a number of challenges, including revenue forecasting, making realistic portfolio valuations and pricing both acquisitions and exits. Nevertheless, a rise in activity in Q3 demonstrates how adaptive the PE industry can be.
Respondents showed a willingness on the part of respondents to diversify into other asset classes and embrace creative deal structures and this year is no different. Rather than retrench into comforting formulas, the PE industry recognizes the importance of responding to the market opportunistically—which bodes well for the asset class’s resiliency during this uncertain period.
In the long term, PE stands to benefit from the sustained low rate, low-yield environment, as it has in the years following the Great Financial Crisis. The PE industry has been shown to outperform public markets in a downturn and this one should prove no different—especially considering the industry’s war chest of US$1.7 trillion in dry powder.
Mergermarket surveyed 100 senior-level executives within PE firms with over US$500m or more in assets under management (and not first time funds) based in North America (45%), EMEA (35%), and Asia-Pacific (20%). The survey included a combination of qualitative and quantitative questions.
About Dechert’s Global Private Equity Practice
Dechert is a leading global law firm with 26 offices around the world. Our global team advises private equity, private credit and other alternative asset managers on flexible solutions at every phase of the investment life cycle. We form funds structured for market terms and tax efficiency; negotiate investments and advise on transactions and financings that maximize value; and structure and execute exits accomplished at the right time and delivering the best returns.
Mergermarket is a business development and market intelligence tool designed specifically for the M&A sector and provides proprietary intelligence and analysis on corporate strategy across the world. With around 200 M&A journalists talking directly to senior executives, dealmakers and other key players in over 60 locations globally, Mergermarket reports on the whole deal life cycle, from mapping out companies’ early stage strategic intentions to tracking deals before they develop and providing real-time news on live events, thereby creating a large window of opportunity. Subscribers can also mine for trends, patterns and deal ideas using Mergermarket’s comprehensive deals database and regular data-driven editorial analysis and commentary. Visit www.mergermarket.com to learn more.