How the COVID Pandemic Impacted Private Equity Activities
The Coronavirus pandemic is a double-edged sword that has sliced both lives and livelihoods, creating panic in various sectors. One such sector is the private equity industry, where companies have had to develop strategies to salvage the situation. The fact is the uncertainty caused by the Covid-19 crisis has led to the lads in financial and asset management having to make some smart choices to cushion their institutions against significant losses, if any, and grab any opportunities that may come up.
The private equity portfolio is quite diverse, and this pandemic situation backed the industry up in a corner since the assets under management by PE firms come from all kinds of sectors, including travel, hospitality, real estate, energy, healthcare, telecom, utilities, transportation and many more. The gambling world was also affected as the market shifted from playing in land-based casinos to online slots real money platforms. Many online gaming and entertainment companies have since moved to seize the opportunity by going public through IPOs or merging with special purpose acquisition companies. This pandemic period has been the prime time for such companies to strike the iron while hot.
As you can see, evaluating how the pandemic has specifically affected the PE sector is a bit complicated. However, some key indicators point to general trends observed in the thick of the Covid 19 pandemic.
Taking lessons from the 2007-2009 financial crisis, governments worldwide, especially in developed countries, have taken purposive steps to keep companies afloat. As a result, financial assets are reported to have received around 9 trillion to help them bounce back from the pandemic. For example, in the US, 2020 saw the shares of Apollo Group skyrocket, reporting an 80% increase from the start of the year. Another beneficiary of the actions of the central banks was Blackstone, a major PE firm that reported a 50% increase.
Despite bitter uproar from the public, the UK also joined in on the efforts to bail out PE-backed businesses, owing to the fact that the sector employs a huge section of the working population. Another incentive for governments is that a big chunk of PE funds is invested in public pension schemes, which means that a significant part of the population depends on the firms to survive the hit so that they don’t lose out in the long run.
Divestments and Acquisitions
Earlier in the year, there had been debates about whether there would be a steep recession and whether this would reduce company valuations and drive up the number of acquisitions. Although the figure was not as high as many had speculated, the pandemic hit an astounding number of companies, and some were forced to sell out or merge to avoid further losses.
Besides, PE firms had to be even more careful about where they would put their dry powder, taking time to conduct extensive research before making a move. Private Equity-backed buyouts were fundamental in divestment efforts in Europe, with 35% of the 3,160 companies selling to PE firms. The biggest targets for PE investments have been companies specializing in healthcare, education, and ICT projects.
A Robust Market Has Been Created in the Last Decade
Over the past decade, investment trends have been changing for the better. Consequently, the private equity market has set itself in a position to handle some of the challenges coming its way. As Mr. Tutrone, the Global Head of Alternatives at Neuberger Berman, informed Bloomberg in a 2019 coverage, PE firms in the US have a capital pool that is always available whenever needed during prolonged periods of volatility.
According to the Market Sentiment Survey conducted in the H1 of 2020 by Invest Europe, the European PE sector proved ‘resilient, adaptable and flexible.’ This is no surprise, as the long-term nature of private equity activities builds resilience in the industry.
The strategies used by PE firms are no surprise as they have been here before, in the 2007-2009 global financial recession. As such, the last decade has been spent evaluating best practices to be applied in case of a repeat, and for the most part, a lot of PE firms had sort of prepared to cushion themselves from the pandemic blow. This doesn’t mean that all stakeholders in the PE sector have gone unscathed by the ongoing economic downtime, as not all parameters will be covered when coming up with continuity plans. Some PE firms have had to shrink back so that they can live to fight another day.