Private equity (PE) firms are expected to pursue a record number of deals in 2020, despite a recession and other economic uncertainties triggered by the global spread of COVID-19. Through mid-November, investors announced nearly 4,100 deals, up 5% from all of 2019, clearing out a backlog of transactions.
Since then, the promise of vaccines and clarity around election results has made the outlook clearer, and the long-term outlook is positive. But valuations for attractive assets are high and competition is fierce. To succeed now, PE firms will want to change their playbook, focusing instead on data-driven analytics to drive value creation.
How to create differentiated value? PE firms need to stay focused on their core value propositions and enhance them with technology. They need to use data more effectively to drive human thinking that increases value before, during and after their transaction. And it's time for PE firms to implement a strategic ESG plan, as this has become top-of-mind for a broad range of stakeholders.
PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.
PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021. Explore national deals trends
PE firms are adapting despite the increasing volatility, addressing heavily impacted parts of their portfolios and defining new trends emerging from the shifting industry dynamics.
There are likely to be several short, medium, to long term effects from the pandemic on business models, consumer behavior, public policies, etc. That makes this situation unlike past recessions - while the immediate effects are visible, the long-term uncertainty makes any predictions about the value of impacted businesses extremely speculative.
Important structural differences between national economies are created by shutdown mandates, fiscal policy responses, low oil prices, interest rates, and trade-flow disruptions. For example, in some countries the market caps of the banking sector have fallen by 10-15% and in others by more than 30%. Similarly, in the industrial equipment and machinery market, we’ve seen valuation changes from -27% to +19%.
Changes in these variables produce periodic revaluations of regions and sectors. These revaluations are then expressed in sector valuations and country indices, thereby impacting asset allocations and general and limited partners (GPs and LPs, respectively) portfolio choices. For PE firms, this means the choices are getting more subtle.
In the wake of the 2008-09 financial crisis, price-to-earnings (P/E) ratios snapped back quickly in some industries. However, it took other industries up to a decade to recover and P/E multiples in some sectors were re-rated downward. In the current pandemic recovery, the dynamics are somewhat different. For one thing, valuations did not decline this time; in fact, for many assets, they’ve risen. When making decisions on investments and exits, PE investors will need to consider broader macro and sector-specific prospects. Investors will also need to evaluate if and when each sector within their portfolio of invested companies will rebound and how the recovery could play out.
“Private equity firms are busier than ever. The issue: choosing survivors and disruptors.”
Private Equity Tax Leader, PwC US
Private Equity Advisory Leader, PwC US
Private Equity Assurance Leader, PwC US