The year started with a strong Q1, characterised by the results of the UK general election. UK equity markets pushed higher with domestic stocks and small-capitalisation equities leading the way with Brexit as relegated to a small 'footnote'
In Q2, it all suddenly changed as it became clear that coronavirus was set to take hold. In a matter of weeks, we saw functioning economies go into virtual shutdown as governments around the globe worked to protect their population.
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Private equity focus on portfolio
The key word at this time was 'portfolio'. Funds were focusing on protecting and supporting their portfolio investments to ensure they were taking the correct measures to minimise the impact. They had to learn how to operate in a virtual environment, how to approach and survive in this new market to be able to find opportunities, despite uncertainty about the future.
Q3 gave everyone a bit of a break from the emergency as lockdown was lifted. As stability started to return, together with people’s ability to work within the limitations of lockdown, there was a rebound in activity levels with a definite increase in deals both completed and launched, thanks to a 'can do' attitude towards remotely executing deals. Bolt-on opportunities were leading the deal volume and the funds pipeline was filling up again.
Q4 saw many deal completions: bolt-ons, secondaries, and exits. This was, in part, a 'catch up', but also the attractiveness of resilient and growing sectors and businesses, and an abundance of capital trying to complete before the end of the year.
There has also been an increase in carve-out opportunities coming from big corporates that are:
- in need of liquidity
- selling off parts of their business no longer deemed strategic
- aiming to monetise in a market currently driven by sellers.
An accelerating market
The private debt market has been accelerating exponentially since the coronavirus situation began, as it supports those businesses that couldn’t access government funding. We've already seen new and repositioned private credit funds with multiple strategies, including special situations and dislocation funds come to market.
2020 was polarised: great assets, which transacted, versus struggling ones, but nothing really in between. Multiples were set very high for those assets that have been resilient or even benefited from lockdown. Meanwhile, bolt-on acquisitions were incremental parts of the deal amount over the year, with a lot of opportunities for portfolio companies to grow via acquisitions, leveraging the struggles of some targets.
Since March 2020, there was a real expectation of a surge in the pipeline of restructuring/turnaround situations, but that turned out not to be the case thanks to the government support. Once these schemes come to an end, however, we could see a significant increase in businesses requiring an equity partner. But the full impact remains to be seen.
Private equity looking ahead
It will take a while before coronavirus will be just a memory, but since the news on the vaccines, there seems to be a light at the end of the tunnel, and there is a positive vibe despite all the other uncertainties we'll be facing in 2021.
Most funds have been quick to adapt their strategy to navigate this market, although some are more flexible than others.
It feels like the bar for new investments has been raised quite high. That said, there will be casualties: management skills and portfolios performance will be fundamental for limited partners to decide what they want to do with their committed capital or where they want to invest next.
In 2021, the post-Brexit priorities will be to replenish the public purse, which may eventually lead to an increased tax burden, specifically capital gains tax. In addition, a possible recession and Brexit, among other challenges, mean funds will need to be as flexible and strategic as possible if they want to take advantage of this new market or simply survive.
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