COVID-19 has a bad impact on private equity. The number of buyouts, exits, fund-raising and returns have declined sharply.
The private equity industry is experiencing a sharp decline in global buyout and exit transactions. Signposts globally suggest the same will happen in fund-raising and as the year progresses. The industry is sitting on a record level of dry powder, which is forcing firms to find and close deals. The markets are riled up by volatility and cash-strapped companies are struggling to predict demand for the coming year. Here’s what the future looks like in each market category.
Investments
Between January to April 2020, global buyouts transaction fell 60% and is now dwelling at near a third of the five-year monthly average. General partners are focused on stabilizing their portfolio companies, sellers are skeptical about selling their companies amid uncertainty and lenders are busy tending to exist loans amid. Lenders are struggling to find out how to assess risk amid increasingly uncertain macroeconomic activity.
However, unlike the last global recession, banks aren’t frozen, but leveraged lending has slumped 80% this year.
The private equity industry has significantly more dry powder to do deals. The private equity funds had a record of $2.6 trillion in April. While funds are looking to put the money to workplaces like General Partners with the mandate, they are under debt. In early March, more than 90% of leveraged loans were trading above 90. As pandemic took hold, more than 90% of them went below 90as a percentage of par by late March. In the meantime, the market recovered to an extent, but 40% of issues were still trading below 90%.
Loan-to-own, distressed investments with no control (trade-in/trade out), direct lending, etc. have become go-to strategies for debt specialists. Equity funds have come up with creative structure equity deals that range from preferred stock and PIPE transactions. PIPEs are customized investment strategies in newly issued tranches of equity that can help public companies raise cash quickly when banks are not ready to lend.
PE firms, hedge funds, and other firms have invested more than $8.6 billion in US PIPE investments. The $400 million partner’s investment in publicly traded Outfront Media Inc. by Providence Equity Partners and Ares Management Corp is a prime example in the category of investment.
Exits
Since January exit transactions have fallen to 72%. Equity funds are waiting to get things before selling anything that can be avoided. The majority of GPs, on the other hand, don’t want to exit portfolio companies in the next 12 months, according to a survey by Investec.
The majority of PE portfolio companies had been just bought and GPs are coming off many years of consistent strong deal-making. Even now when GPs are sitting on assets that they are expected to sell in a normal market, they won’t sell if the price isn’t right. Increasing the pool of assets will likely increase activity once the rebound takes shape.
Returns
The majority of both LPs and GPs are expected to see write-downs of at least 15% in funds’ first-quarter valuations, according to Campbell Lutyens Survey.
For funds, it’s difficult to value companies in the pandemic, fledgling cash flow, volatile market, and lack of comparable transactions.
The pattern created by the pandemic is clear. Private equity deals made before the pandemic are better than deals made after the pandemic, according to a Bain & Company report. To maintain strong returns long term, stay on offense.
