With Ample Dry Powder on the Sidelines, Private Equity Investors’ Top Priority in 2021 is Deploying Capital to Quality Companies

Dec 2020

Economic Uncertainty Leads to a Heightened Focus on Portfolio Company Management Teams

Looking to 2021, 88% of private equity (PE) investors indicate their most important objective is deploying capital, a nearly ten point increase from 79% in 2020, according to a recent survey of private equity investors conducted by Lincoln International.

Private equity investors remain focused on identifying acquisition targets—nine in ten (89%) investors expect to be more active in buying than selling portfolio companies in 2021, compared to eight in ten (82%) the previous year.

Additionally, most respondents expect deal volume to be up in 2021 compared to Q4 of 2020, with 27% expecting volume to be up meaningfully and 50% expecting volume to be up slightly. Just 7% of investors expect deal volume to trend down. The challenge investors face is the supply-demand imbalance of quality businesses.

“When the pandemic struck, investors took a step back while M&A activity slowed and instead spent time researching companies that will emerge stronger. Investors are willing to pay higher multiples for these businesses and will work quickly to complete those deals, given the shortage of quality buying opportunities today. With so much capital ready to be deployed investors are also willing to widen their aperture, searching for targets in new geographies around the world,” said Phillip McCreanor, Lincoln’s Head of Investment Banking, UK & Nordics.

Heightened Focus on Management Team Quality Emerges

When asked what impact economic uncertainty will have for them in 2021, private equity investors reported:

  • Applying a heightened focus on quality of portfolio company management teams (68%),
  • Longer hold periods for portfolio companies (59%), and
  • A continued focus on the liquidity of portfolio companies (43%).

Many private equity investors are attributing portfolio company success during COVID-19 to management team proactivity and agile decision making and, in converse, see a change in management as a tool to right the ship for struggling businesses.

“When selling a business, the difference between a good outcome and a great outcome often comes down to the quality of the management team,” said Robert Brown, CEO of North America at Lincoln. “Private equity is looking for management teams who have a strong pandemic story to tell—those that can explain the specific steps they took to manage through the crisis and, subsequently, unlocked new potential for future growth.”

Pandemic Heightens Importance of Targeted Deal Making, Careful Documentation  

The continued challenges presented by COVID-19 have led to a keen focus on demonstrating COVID-19 resilience through careful documentation, with 58% of respondents indicating it is a key step in preparation for investors conducting post-pandemic due diligence.

Additionally, four in five investors (82%) are pursuing more targeted deal making as opposed to broad auctions.

“Psychologically, for the last four years investor dread of a cyclical market contraction has cast a shadow. But now we are in it—and deal making has snapped back at a rate that no one could have anticipated. Recent strides in vaccine development have further buoyed investor confidence,” said Brown. “With some resolution of uncertainty, private equity investors are starting to exhale, and as a result we expect heightened levels of deal making in the year ahead.”

Lincoln International surveyed 150 private equity fund managers at firms across the United States and Europe in October 2020. Download full survey findings here.

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