Private equity deals insights: 2021 outlook

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Private Equity (PE) firms see value ahead, but they’ll have to work for it

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.

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Challenges and opportunities for deals in 2021

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 deals outlook

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.”

Manoj Mahenthiran, US Private Equity Leader

Key deal drivers

New ways of being

Even after the health crisis has receded, psychological impacts and behavioral changes will remain for both consumers and businesses. What originally was thought to be a short-term change is projected to be a long term or even permanent approach in models as consumers are gaining confidence in the new normal. As consumers change the way they work and live, with more emphasis on virtual behavior, investors will likely place a higher value on companies that can quickly adapt to these new patterns.

There will be opportunities for PE firms that are prepared to understand the core businesses. Essentially, they will be buying an option on transformation: can portfolio companies expand to new markets and new product launches? For sectors that haven’t fared well, can they reinvent themselves, or reskill the unemployed workforce to their advantage?

This is a fundamentally different kind of work, and it can be even more rewarding. In fact, we are already seeing fewer deals based on the traditional playbook of buying a company and selling off its pieces. Instead, we’re seeing more elements of operational transformation, including vertical integration and acquiring complementary capabilities.

In the wake of the pandemic, we also see a renewed focus on societal issues, from privacy to corporate responsibility. PE firms can also expect to see increased focus from limited partners and potential investors on environmental, social, and corporate governance (ESG) concerns. Investors will likely want to know how they’re addressing these risks in future deals and ongoing investments. The thesis: companies with management practices that consider broader industry, regulatory and societal risks are more likely to drive long-term sustainable performance, shareholder value and greater investment returns.

Shifting industry paths

The COVID-19 crisis is having widely diverging impacts on different sectors, giving rise to both winners and losers. This pattern will likely continue to play out -- across individual sectors during the recovery, but also longer term. For example, shifts in the way consumers have reimagined their lives amid the pandemic are also reshaping the appeal of certain industries. Just a few years ago as ride sharing took off, people started rethinking car ownership and other ancillary businesses like insurance and auto services. But as many travelers valued safety more than convenience following the COVID outbreak, investors renewed their focus in automobiles – an industry that was relatively flat or even slightly declining just a year ago. Similarly, brick and mortar retailers have struggled — and yet, some have been able to mitigate losses or even thrive by rapidly adopting a mobile order model or alternative delivery platforms through in-house capabilities or acquisitions.

Another development likely to continue changing the way PE firms think about investing is the rise of Environmental, Social and Corporate Government (ESG) investing. This is especially so across the technology industry, where public pressures have driven leaders to address issues including public safety and security. As PE players rebalance their portfolios and invest in a space that is top of mind for their funds, employees and limited partners, companies across sectors will want to increase their focus on ESG efforts if they haven’t already.

Opportunities in innovation

COVID-19 has underscored the need for increasingly sophisticated technologies – a development that has shifted investment decisions. Rather than invest in a company on its future potential, investors are increasingly focused on companies that have already invested in technological capabilities over the past few years and are now ready to respond to the complexities of the pandemic better than competitors.

But the coronavirus is just a start; in many ways, it has simply accelerated other inevitable changes to distribution that were already underway. Many technologies associated with the Fourth Industrial Revolution (4IR), such as artificial intelligence, robotics, drones, etc., now appear even more useful, and poised for increased adoption. Consumers have generally adapted to the disruption — arguably, because they had little choice but to do so. For PE firms, this is changing the discussion around timing. At many companies, growth strategies where technology is a centerpiece will continue to be disruptive, driving new business models and productivity across all sectors. But now, rather than discussing technology investments as future capabilities, it’s important to think about how they can be deployed today to address current challenges.

It’s hard to overstate how much is at stake here. With history as a precedent, new disruptive business models will arise from the crisis. Even if the opportunities themselves aren’t clear yet, firms can prepare now by focusing on resilient and diverse supply chains. Once they come into focus, you’ll want to be ready to move quickly.

In a market defined by disruption, finding the right data and insights can also be a key to unlocking competitive M&A advantage. While PE firms certainly have business experience to make good decisions, when you enhance the decisions with data-backed insights, you may see options that you hadn’t yet uncovered. Data about customer behavior, supplier performance, pricing and other core activities can give additional clarity to the big bets that can lead to exponential growth. To stay ahead of your competitive set, you’ll want to develop both the insights that matter now, and the agility to change course for what may be next.

Future of capital

After immediate crisis liquidity issues are met, the reconfiguration of business models will favor patient sources of capital. Interest rates will remain low, driven by central bank policies, but are subject to long term trends in global savings. This is an interesting challenge for private equity firms, which will continue to see pressure to create differentiated value from impatient investors.

We expect that there will be strongest interest in funds that have a proven track record of getting through prior economic recessions — and, on those that have taken portfolios through transformative changes within their sectors / industries of focus.

One of the most significant developments in recent years is the accelerating use of Special Purpose Acquisition Companies (SPACs). Companies that are looking for an exit now typically explore a tri-track process, evaluating the benefits and hurdles to executing a successful sale, a SPAC merger, or a traditional IPO. By merging with a SPAC, companies benefit from having wider access to capital, liquidity and experienced managers, as well as greater market certainty and flexibility to structure deals in their favor. PE firms have looked increasingly to SPACs as an alternative investment opportunity and have been key players in the recent SPAC boom. For PEs, SPACs require a relatively low upfront investment with a very significant upside potential and shorter investment horizon. If the rapid growth continues in early 2021, it will be a helpful option to firms looking to access new sources of capital.

Contact us

Manoj Mahenthiran

Manoj Mahenthiran

Private Equity Leader, PwC US

Puneet  Arora

Puneet Arora

Private Equity Tax Leader, PwC US

Eric  Janson

Eric Janson

Private Equity Advisory Leader, PwC US

Mark Watermasysk

Mark Watermasysk

Private Equity Assurance Leader, PwC US

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