Mergermarket is pleased to present After the storm: Private equity after COVID-19, published in association with IHS Markit.

As challenges abound for the PE community, our survey of 30 PE executives reveals that most firms are up for the fight. First, PE firms are actively managing downside risk in their portfolio companies – including operational risks associated with COVID-19. Second, a significant proportion of respondents are looking to tap into higher returns by diversifying their asset class exposure. Third, firms are increasingly adopting advanced technologies to acquire a competitive advantage.

Key findings include:

• 37% of respondents say they will be prioritizing managing downside risk in their portfolio companies over the next 12 months.
• 57% believe the PE industry should adopt a standardized reporting policy for fund performance to combat instances of fraud and improve transparency.
• When asked which parts of their businesses have benefited the most from new technologies, the top three answers were regulatory reporting, due diligence and portfolio analysis.

Despite the tumultuous events of 2020, the private equity industry has proven that it can roll with the punches, according to 2021 Global Private Equity Outlook, an annual report co-published by Dechert LLP and Mergermarket. This report discusses how the sector fared amid the ongoing global pandemic, economic upset, and geopolitical pressures that marked this year as well as what the future may hold for this robust and creative industry.

The report includes insights from a survey of 100 senior PE executives, including these key findings:

PE Industry Resilience: While the COVID-19 pandemic has caused widespread disruption across the global economy, the effect of the first wave on the private equity industry proved short-lived. After a short, sharp shock going into Q2 and many auction processes knocked off course, the sector rebounded impressively with total buyout activity in Q3 reaching US$148bn, exceeding levels in 2019 by 10%. The industry’s resilience and ability to bounce back so rapidly should be a cause for optimism through the current wave of the pandemic alongside record sums of dry powder.

Private Credit: Private credit continues to grow in popularity, with 35% of firms having increased their use of these loans in the past 3 years, and almost half (49%) now using private credit as much as traditional bank financing in their buyouts. Greater flexibility on financing terms and ease of execution were cited as top benefits of this type of deal financing. U.S. Election While 58% of respondents believed a would-be second term for President Trump combined with Republican congressional control would have the most positive impact on the PE market, a clear electoral result for President Elect Joe Biden also is a relief for dealmakers.

Carve-outs: Carve-out activity looks set to spike, with 60% of respondents forecasting an increase in the number of carve-outs targeted by their firm. With current economic headwinds putting earnings under pressure, 33% of GPs cited corporates’ need to pay down debt as the primary driver of this trend, with 21% pointing to a desire to conserve liquidity. Carve-outs are also a useful strategy for PE houses themselves— with 17% planning on carving out units of portfolio companies.

Getting Creative: The year’s challenging conditions have seen firms get creative across a range of deal types, with many options set to remain popular heading into 2021. 98% of respondents were likely to consider partnerships with strategic buyers, whereas distressed deals were being weighed up by 87% of firms. Structured equity investments also remain attractive, offering GPs flexibility, greater security and limiting downside risk.

Trade: Geopolitical concerns loom large for firms, particularly in Asia-Pacific. A quarter of APAC respondents cited the US-China trade conflict as the single greatest issue for the deal environment over the next 12-18 months, greater even than the COVID-19 pandemic. Beyond the trade war, new foreign investment rules set by countries including India, Japan and Australia look set to add new dimensions to trade considerations in the APAC region. Notwithstanding, Asia-Pacific saw an impressive 13% increase in buyouts compared to 2019.

Growing concerns about the state of politics in major markets as well as fears over a potential recession are the biggest challenges currently facing the private equity industry. Amid this volatile environment, innovative strategies are becoming commonplace as the industry is being forced to adapt to an overabundance of capital.

In order to understand how the current PE market continues to evolve, global law firm Dechert LLP commissioned Mergermarket to survey 100 senior private equity executives from across the globe for their insights.

Key findings include:

• Nearly half of respondents (48%) said they plan to diversify their asset class exposure without a doubt over the next 12-24 months, and another third (32%) said they will most likely do so.
• The top-cited fundraising challenge among respondents was the trend of large LPs concentrating their investment relationships to a smaller number of funds (27%).
• There are high expectations for carve-outs, with the majority of respondents in our survey anticipating an increase in the number of such deals.