More than two-thirds (67 per cent) of private equity professionals expect to achieve higher returns this year than in 2020, with just 3 per cent expecting lower returns, according to Investec’s annual GP Trends survey.
The research, which analyses the views of 219 private equity professionals around the world, reveals an industry upbeat as we emerge from the pandemic, eager to deploy capital and sanguine about the threat of SPACs.
When the pandemic struck last year, GPs made significant downward adjustments to their return expectations.
This year, optimism has flooded back, with the overwhelming majority (97 per cent) expecting their returns to exceed (67 per cent) or match (31 per cent) those achieved in 2020. This is especially true of smaller funds: 70 per cent of those managing funds smaller than GBP1 billion expect to improve on last year’s performance, compared to 55 per cent of those managing funds larger than GBP1 billion.
The research finds that appetite for ‘bolt-on’ investments (those made after their investment period has closed) is high: 79 per cent are intending to do so, indicating that GPs are seeing value in the market and are keen to take advantage. They expect bank loans/leverage (36 per cent) and LP co-investments (25 per cent) to be the two main sources of finance for these investments (Fig.1).
The types of debt structures in favour, however, have changed markedly in the past 12 months. Just 16 per cent of respondents intend to use syndicated loans to finance portfolio acquisitions (down from 34 per cent, at the height of the pandemic); instead, GPs are turning to asset-based finance, which has risen from being a tool most often used by 20 per cent before the pandemic and 14 per cent at its height to 30 per cent, now.
When asked which sectors look most attractive over the next 12 months, GPs most frequently identified healthcare (67 per cent), TMT (48 per cent) and business services (46 per cent). Interestingly, UK GPs see a much narrower opportunity set than their North American and mainland European counterparts: for example, three-quarters (75 per cent) identified healthcare as an attractive sector, yet just 9 per cent selected consumer and 3 per cent retail. Elsewhere, however, there is much greater parity as to which sectors are deemed attractive (Fig.3).
Despite fears that the SPAC boom would threaten private equity firms’ deal flow and ability to find fair valuations, GPs do not seem concerned: 93 per cent consider SPACs to pose either a low threat or no threat whatsoever, with just 1 per cent indicating that they pose a ‘very high threat’.
Whilst UK GPs are most likely (40 per cent) to dismiss the threat of SPACs entirely, they were also most likely (9 per cent) to see them as a somewhat or very high threat. Their North American counterparts (15 per cent) are less likely to say this, but almost half (48 per cent) nonetheless consider SPACs to pose a ‘very low threat’.
While broadly confident, the managers of large buyout-oriented funds feel most threatened, being the least likely to dismiss the threat entirely and most likely to say that they pose a ‘somewhat high threat’ (14 per cent) to their deal flow.
GPs investing into or out of the UK are likewise confident in their ability to navigate Brexit, with 84 per cent seeing it as a low threat or less, and no respondents considering it to be a ‘very high threat’.
The industry has navigated the operational challenges of the pandemic well, and job satisfaction remains strong. The vast majority (88 per cent) of GPs are either more or equally satisfied in their jobs as they were 12 months ago, with only 3 per cent ‘much less satisfied’.
Despite this, there is a clear expectation that workers will come back to the office, when allowed. No single respondent expects to work fully remotely when lockdowns and other restrictions are lifted, and 78 per cent expect to work at least three days in the office. Just 22 per cent expect to be in the office only one or two days per week.
Whilst working from home, 94 per cent had conducted investment due diligence through virtual meetings.
Jonathan Arrowsmith, co-head of private equity at Investec, says: “For me, the key point from this year’s report is that private equity is keen to ‘put money to work’ and is poised to play a major role in supporting the economic recovery.
“GPs have done a remarkable job of navigating the pandemic, which has affected everything from operations – with working from home and remote due diligence becoming the norm – to portfolio valuations. Now that we are hopefully through the worst, the GPs we’ve spoken to see an enormous opportunity ahead.”