Private Equity Market Poised For Growth

by Patrick Galleher, originally published on forbes.com on June 8, 2021

The private equity (PE) market is poised for growth as it continues to play a critical role in the economic recovery.

Six months into 2021, it is safe to say that the successful vaccine rollout and upbeat market expectations are helping the United States economy recover from the hardships it faced during 2020. The International Monetary Fund expects the U.S. economy to grow by 6.4% in 2021. Similarly, the private equity market is slated to grow over the next several years. Worldwide private equity assets under management are predicted to reach $5.8 trillion by 2025, according to a report by Deloitte, a global consulting firm.

Private equity firms are an essential tool for small-business growth. Following the outbreak of Covid-19, private equity firms stepped up to provide guidance and assistance to the companies in their portfolios. They provided small businesses with capital and advice to survive the sales slump. Private equity firms that focus on building relationships with their employees, portfolio companies and partners will thrive.

Resiliency Of The Private Equity Market

The private equity market showcased its resilience during this difficult season. PE firms focused on the long game and concentrated on supporting their portfolio companies. Private market transaction multiples have remained high. PE firms were able to take advantage of market volatility, and many quickly pivoted to focus on companies that offered pandemic-resistant investments. Private equity-backed buyouts comprised approximately 17% of overall mergers and acquisitions activity in 2020, according to a Harvard University report.

Pandemic-resistant companies were able to continue to operate despite the harsh conditions imposed on many businesses. Investment diversity is essential, and pandemic-resistant options such as utilities, home services, manufacturing and health care all thrived in 2020. PE firms that focus on pandemic-resistant companies can help reduce risk as recovery continues. Firms that made it a priority to invest in companies that valued environmental and social citizenship became key. Experts expect the private equity market to continue to flourish as the pandemic eases in the United States and the country does its part to stimulate economic growth.

Fundraising Strong, Propelled By SPAC Capital

Many private equity firms are raising funds by turning to SPAC capital. A special-purpose acquisitions company is a shell company set up by investors to raise money through an IPO with the purpose of acquiring another company. SPACs can be a risky proposition because they have a two-year timeline and require a blind investment. The unpredictable market in 2020 propelled many private equity firms to use SPACs as a fundraising solution. More than 200 SPACs launched in 2020, which was three times as many as the year before, according to PitchBook, a financial data and software company.

Helping Portfolio Companies Thrive

One of the hallmarks of 2020 was how private equity firms stepped up to help the companies in their portfolios following the outbreak of the pandemic. PE firms invested heavily in making sure their portfolio companies were able to work remotely, which required many companies to increase their security tools to diminish vulnerability. Communicating with partners was invaluable. Taking steps to solidify contingency plans was important last year, as well.

Adapting To Virtual Strategies To Close Deals

The outbreak of the pandemic forced private equity firms to adopt virtual strategies to close deals. While they relied on their technical expertise to provide companies with the tools they needed to continue to do business last year, they also had to change their model to continue operations. The lack of in-person due diligence has put many PE firms without existing limited-partner relationships at a disadvantage. However, many limited partners are re-prioritizing adding new general partners, which is going a long way to creating a healthy first-time fundraising environment.

Private equity firms are continuing to flourish by capitalizing on unique fundraising opportunities and forming relationships to help their portfolios succeed. If private equity firms follow the lessons learned last year, they will continue to be a major tool to fuel small-business growth and recovery in 2021.