Current Private Equity Market in Covid environment vs. 2008-2009 Recession?
Bain & Company, a specialized global consultant to the private equity ("PE") industry, feels the PE market will behave more favorably in this current Covid environment versus the 2008-2009 global financial crisis ("GFC").
- Credit markets have tightened, but not frozen.
- Banks are generally putting new lending on hold as they focus on working with existing borrowers to avoid default.
- PE Funds have roughly $2.5T in uncalled capital that needs to be invested, with more than 3 times AUM compared with 2008 that can fill some of the lending gaps left by banks.
- With public markets somewhat depressed and potential corporate buyers holding onto cash, PE Funds may be positioned to buy assets coming up for sale.
- Exits will likely drop as holding periods are extended while sellers wait for markets to recover, but not as steeply as in 2008.
- Institutional investors that went through the GFC are more likely to remain confident in PE investing and understand the importance of vintage-year diversification during a downturn, as a result fundraising declines due to Covid may be less severe than 2008.
Key Factors to PE Success Now
Key factors in successful PE activity in and after Covid environment will include:
- Sector expertise.
- Ability within a given sector to quickly recognize and act on emerging trends to capture the most gains.
- Digitalization of the entire investment value chain.
- Customer service/retention.
PE Challenges and Potential New Strategies1
The long-term outlook for PE business services is pretty strong. Current potential challenges include:
- asset price multiples are still at record levels, indicating investors will need additional sources of upside going forward,
- many key sectors are well along their market penetration curves, indicating the pace of growth may soften over time unless new revenue sources are found.
Taken together, these issues mean creating the kind of value PE investors have become accustomed to will require new strategies.
- Business service deals have relied largely on revenue growth, often through mergers and acquisitions, and multiple expansion. As this becomes harder, especially in a slowing economy, business fundamentals and margin management become more important to improve cash flow and generate returns.
- Many companies will have good opportunities to build value through reworking cost structures and improving how services are delivered. Attention can be placed on more fully integrating acquisitions and IT systems, marketing opportunities across platforms, digitalization, improving efficiencies and the customer service experience.
- Staying on the cutting edge of demand trends to take advantage of possible new market opportunities within each given specialty; by customer segment and with geographical competition.