Analysts paint a cheery outlook for Private Equity Funds in 2021 and beyond as the industry is helping businesses weather COVID-19.
A PwC report in November 2020 revealed that the number of PE investor deals by the middle of that month was already 5% higher than all of 2019. Deloitte’s most recent private equity forecast predicts global PE assets under management will reach USD 5.8 trillion by 2025.
As COVID-19 has shaken up businesses the world over, private equity is poised to be a major driver of economic recovery. PE firms are well-versed in improving the business strategy and financial outlook of portfolio companies, and under their guidance businesses have been able to pivot strategically to stay profitable.
Businesses both large and small are benefiting from the capital and transformative expertise that private equity brings to US businesses. In May 2020 the cosmetics and fragrances business Coty, whose portfolio includes brands such as Marc Jacobs, Calvin Klein, Chloé, Gucci, Hugo Boss, and Tiffany & Co, sold $750 million of convertible preferred shares to private equity firm KKR. The same month, Apollo Global Management invested $300 million in Cimpress, a leader in printing marketing materials for small businesses, and is working toward optimizing its capital structure.
Private equity forms the backbone of the American economy.
How Private Equity is Poised to Help America Weather COVID-19
It’s no secret that private equity has a mixed reputation to the general public, primarily spurred on by large profile stories like the downfall of Toys “R” Us. The reality is much more nuanced, however, and a few high-profile mess-ups overshadow thousands of success stores.
Over 8,500 US businesses are backed by private equity, which is twice as many companies are listed on US stock exchanges, and these are primarily middle-market businesses with revenue between $25 million and $1 billion.
An EY Report from late 2019 emphasizes the enormous impact PE has on the US economy:
Direct employment of 8.8 million workers across all 50 states, who earn $71,000 per year in wages and benefits on average;
Supply chain employment of 7.2 million workers;
And related consumer spending supporting 10.4 million workers.
Then 2020 hit and COVID-19 created unprecedented challenges for the American economy.
Andrew Weinberg, Founder and CEO of Brightstar Capital Partners, recently took to Forbes to discuss how firms like his are helping businesses through this difficult time. Brightstar recently acquired a majority stake in Amerit Fleet Solutions to inject additional resources and relationships to capitalize on the significant growth potential with both new and existing customers across diverse end markets.
He succinctly outlined the role that private equity plays in the success of American companies:
“For families, founders, and entrepreneurs who’ve built these middle-market companies, partnering with a private equity firm means an infusion of capital to grow a local franchise into a regional franchise. It means being able to make necessary investments to upgrade critical systems, and consolidating fragmented suppliers into more meaningful, long-term relationships that grow with the company. And most importantly, it means access to expertise from executives who have previously led similar efforts and can guide a company towards its new, ambitious future.”
Let’s take a closer look at some of the tactics PE firms are using to help shore up their portfolio companies against the onslaught of COVID-19.
Private Equity Tactics That Are Being Leveraged For Financial Stability
Shore up finances to help upgrade against COVID-19
PE firms have flexibility in when and how they choose to deploy funds from limited partners (LPs), and their oversight and expertise working with similar businesses allows them to steer a portfolio company through a crisis.
Beyond an emergency infusion of cash, many funds are looking to prioritize patient sources of capital in a business model – a tried and true strategy that worked in the 2008 recession. Despite reacting slowly to that other financial crisis, buyout funds with vintage years 2008–2011 still managed to achieve a pooled IRR of 13.0% compared to 9.2% for vintage years 2004–2007.
Innovating to meet a new reality
COVID-19 will permanently shape the way we work, shop, and access services – and forward-thinking PE funds can help companies innovate to meet these needs. This could be a focus on digital transformation, new markets, new product launches, or identifying what is already working well and boosting it.
A focus on Environmental, Social and Corporate Government (ESG)
COVID-19 isn’t the only existential challenge facing us at the moment. The recent US natural disasters such as the California wildfires and Texas deep freeze are a reckoning for businesses that have no evaluated their environmental footprint. PE firms’ investors want to see that businesses are forward-thinking in addressing these challenges, which then becomes a priority in innovation.
We Help Navigate the Private Equity Landscape
If you are looking for different venues for investment in your business or considering working with a private equity firm to recover from COVID-19, we can help.
Our Private Equity leadership team has extensive knowledge of several industries’ financial considerations and has provided value to mid-market businesses navigating private equity. Our consultants can provide you with all the strategic financial oversight and direction you need for a stable financial future so you can concentrate on innovating and generating a lucrative ROI.
Contact us for a free consultation, and we’ll outline how our services can help your business reach the next plateau of success.