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What you need to know to turn today’s companies into tomorrow’s innovators and corporate citizens

Scott Gehsmann Deals Partner, PwC US March 11, 2021

Even though certain parts of the CARES Act have expired, US businesses hard hit by the COVID-19 crisis will continue to have a range of funding sources to navigate the economic uncertainties of the pandemic. Increasingly, companies are accessing capital through the private versus public markets, and private equity has quickly become a preferred option. Companies are turning to PE not only to access liquidity, but also because they want to transform their business at a time when the pandemic has upended many industries and shifted what customers have come to expect and value. 

Behind PE’s rise

In terms of assets under management, expect PE to lead — overseeing an estimated $8.3 trillion of assets by 2025, up from $5.2 trillion in 2018 and $3.3 trillion in 2014, according to a PwC analysis. This outlook will depend on the trajectory of the economic recovery, but what’s likely to contribute to PE’s ascension will be investors chasing higher yields in a challenging climate. Given that the Fed has pledged to keep its key lending rate near zero at least through 2023, PE is poised to continue seeing substantial growth in the years ahead. 

PE firms globally now have more than a record $1.4 trillion available to invest, up from a previous record of $1.3 trillion in 2019. This comes as the number of US listed companies continue to drop from a peak of 7,400 in 1996 to less than half of that now, although this perspective often gets lost as tech stocks soar to new records.

Those willing to leverage PE capital and make deals in a downturn could see better returns than others in their industry. According to a 2020 PwC report on M&A, for example, median shareholder returns for companies that made acquisitions during the 2001 US recession outperformed their industry peers, rising up to 7% a year after the transaction was announced. 

Considerations in the months ahead

The impacts of COVID-19 remain uncertain with the emergence of new variants. As companies adjust their business outlook, PE firms developing strategies for their next opportunities should consider several key actions.

  • Reposition and reset business models. The pandemic has affected all industries and their downstream supply chain providers, but in very different ways. The travel and entertainment industries, for instance, have been harder hit than tech and pharmaceuticals as consumer and business behaviors rapidly change. We’re experiencing an uneven or K-shaped recovery, and investors should consider how certain industries might evolve years from now by evaluating what technologies, talent and other capabilities industry leaders will need to succeed going forward. PE investors have the capital and experience to steer companies toward more prosperous futures. 
  • Prioritize more equitable and sustainable growth. PE firms have long been known to turn troubled companies around, and the growth of environmental, social and governance (ESG) investing presents a unique opportunity for the industry to execute deals differently as the pandemic unmasks society’s deeper inequalities and environmental vulnerabilities. This will require PE to create value not only for the companies they invest in, but also for their employees and communities. 
  • Factor more black swans in investment decisions. The unpredictable nature of the COVID-19 crisis should remind us that black swans happen. As PE investors reevaluate their portfolios and consider new deals, they should proactively prepare for more frequent scenarios involving severe consequences.

The bottom line: PE represents a rapidly growing and changing slice of the capital markets at a time when there are many more options to access funding like special-purpose acquisition companies (SPACs), which PE firms have sponsored. As PE assets under management continue to expand, leaders face a rare opportunity to shape today’s companies into tomorrow’s most admired innovators and corporate citizens.

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Want more insights on the big issues facing business and society in the year ahead? Our global series reveals how six disruptive forces are shaping our world in the year ahead and also serve as a framework to identify opportunities in the next normal. 

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Neil Dhar

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