Coming out of the storm: Increasing PE optimism in later 2021

Karen Allan and Melanie Pittsa, haysmacintyre

By Melanie Pittas, partner and co-head of financial services & Karen Allan, director, haysmacintyre – The private equity industry faced a number of challenges during the pandemic, with the majority of these arising from one underlying issue: uncertainty. These challenges included valuations, investor pessimism and a downturn in investment activity.

From a practical perspective, firms have had to work through the transition to remote-working and virtual due diligence processes; one year on and these have now largely been bedded in and, despite the easing of travel restrictions and hopes of brighter times on the horizon, look set to be key considerations in the months ahead.

For the majority, fundraising in 2020 did initially reflect the market reactions to Covid-19; there was nervousness in the sector and in the early days of lockdown there was a sense that valuations were overstated, resulting in further slowdown of acquisitions.  In Q2 and Q3, the investor due diligence process slowed, in the hopes of a prompt return to normality.  After an initial period of adjustment to the new paradigm and associated technology, there came an acceptance that some activity, albeit in a virtual space and on a reduced basis, would resume and so the industry adapted.

Of course certain industries performed better than others during the pandemic, for example medical and fintech considered against property and hospitality, meaning some managers did not experience this downturn in activity and carried on with ‘business as usual’. A key challenge presented by the lack of in-person activity was in part offset by the ability to increase touch points through the time saved in a virtual working environment.

Irrespective of the various drawbacks, allocators have identified some clear advantages to moving the process online, notably the ease of connectivity across time zones and increased meeting loads due to reduced travel.  Anecdotally, capital flows and pipelines are strong, but the process is, inevitably, slower than pre-pandemic.

With calmer market conditions and an industry now more confident, expecting a return to normalcy by the end of Q2 2021, firms should be seeking to capitalise on new opportunities and make up for lost time; it is therefore particularly important that firms position themselves favourably against their peers.  Critical to this will be financial preparedness. Detailed budgets and forecasts which stand up to scrutiny by investors and regulators are a given.

Careful consideration should be given to the likely financial implications of new working practices.  There is no ‘one size fits all’ solution but, whilst the office maintains a key function for purposeful, collaborative work, now is not the time to be investing in an expensive long-term lease on office premises. However, do consider the robustness of your technology solutions given the current direction of travel. Though the need for a weighty travel and entertainment budget in present times is minimal, once the world reopens there will likely be appetite for a return to previous levels of both, and therefore these costs should not be underestimated.

Plan prudently and for longevity, both in terms of your cost base and service provider selection: stress testing should consider the impact of delayed fundraising, investment valuation discrepancies, and a buffer in the cost base, and your outsourcing (if applicable) and service provider solutions must be scalable.  All UK-based FCA regulated firms must be mindful of the potential impact on capital of the new prudential regime, due to come into effect in January 2022.

Cultural considerations will also come to the fore as we prepare for a return to the workplace later this year. Established firms have an embedded culture and have therefore found it easier to adapt operationally over the past year. Technology has enabled trading to be performed from anywhere, and both emerging and established firms will undoubtedly use this to their advantage to extract the benefits from a hybrid approach to working.

Despite there being some uncertainty about the rate of recovery in the sector post-pandemic, there is increasing optimism as we move towards more relaxed regulations in the UK. Future performance will depend on the sector in which each individual fund focuses and it is likely that investors will seek a degree of security, whilst capitalising on any opportunities arising. 

Reports show that there were 1,936 transactions closed in Q1 of 2021, a year on year increase of 80 per cent. This tells a positive story, and we look forward to seeing what the rest of 2021 has in store. 

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