Deal flow will stay flat until we come out of lockdown

Trickle of water from a hose

Deal flow will remain depressed until the UK lockdown eases, according to the UK & Ireland Private Capital Breakdown, which covers Covid-19’s impact on the private equity industry.

One of the key findings of the latest report is that until we see substantial easing in the UK & Ireland lockdown deal flow will remain depressed as GPs do not plan on closing investments through an entirely virtual process. Most managers will close deals only once they have met management teams face to face and they’ve seen the business operating in full motion.

Another trend is that the IT space will lead the way in the post-pandemic recovery. GPs invested a record EUR7.7 billion into private equity-backed IT companies in Q1 2020, equating to nearly one-fourth of UK & Ireland’s total private equity deal value in the quarter.

As a proxy, during the global financial crisis, IT’s proportion of the region’s overall deal value increased from 4.9 per cent in 2008 to 16.8 per cent in 2009.

Previously released research by the company providing research and data on venture capital, private equity, M&A, and public companies has already shown that private equity deal activity reached a new first quarter peak in Q1 2020, which means that we are yet to see a pandemic related slowdown in the remaining quarters of the year. 

The UK & Ireland entered this crisis following a decade-long bull run in private equity and after a record year for venture capital deal value. Now, Covid-19 is expected to curtail growth across the venture ecosystem in the UK & Ireland and limit deal flow till Q4 2020 as GP’s focus on managing portfolio companies.

The study also found that deal activity will decrease in comparison to the last three years as start-ups, most of whom are loss-making, flatten capital expenditure.

In 2019, VC deal value in the UK & Ireland reached EUR10.9 billion, the highest annual figure ever for the region and the momentum was carried into Q1 2020 as investors flowed EUR 3 billion into VC deals.

In the short term, investment into logistics, resource management and telemedicine is expected to rise in the UK & Ireland, along with traditional drug discovery and automation in the long run.

Deal making will subside within the VC space as well, as scaling efforts are slowed and investors focus on existing portfolio companies.

Moreover, Pitchbook believes cross-border investment from the US is likely to drop during the remainder of 2020 as domestic investment takes priority and infection fears increase regarding long-haul travel.

Other key takeaways include sharp falls in anticipated private equity acquisition prices, while private equity portfolio valuations will fall in 2020. Close to 12.5 per cent of UK private equity-backed assets are in sectors that are affected by the pandemic, such as retail, travel and entertainment.