The Growing Private Equity Market –How PE firms can use expertise, technology, and agility to exceed stakeholder expectations

By Patrick Henry, Frank Fumai, Tania Lynn Taylor and Jagat Patel, Deloitte

Often behind the scenes, private equity firms stepped up to support their portfolio companies during COVID-19 in myriad ways. Learn how PE firms will likely continue to play a pivotal role in the economic recovery.

Key takeaways

  • Formidable growth is anticipated in private equity (PE) over the next few years. Our base case scenario (55% likelihood) forecasts global PE assets under management (AUM) to reach US$5.8 trillion by 2025.
  • Since the pandemic hit in early 2020, many PE firms have stepped up to support their portfolio companies in myriad ways. Portfolio companies—especially smaller ones—seem to appreciate PE’s management input and industry connections as much as the capital they provide.
  • As portfolio companies look to form partnerships with their PE providers, building relationships and demonstrating industry expertise have become more important than ever. One way for PE firms to excel in this regard is to focus on building diverse teams and boards.
  • PE firms that excel at building and deepening relationships with three key stakeholder groups—their own workforces, portfolio companies, and limited partners—will likely be best positioned to cultivate and maintain growth in the long term.

The symbiosis between private equity firms, portfolio companies, and limited partners

PRIVATE equity (PE) firms play an important role in the economy: They can help small enterprises grow, and, in turn, generate returns for investors. In times of crisis, such as the COVID-19 pandemic, they often become even more important, providing companies with capital and industry expertise to help them weather the crisis better.

Also, as the public market equity valuations rise, PE funds may become relatively more attractive to investors on a valuation basis. The S&P 500’s forward price-to-earnings ratio (27.5 times analysts’ next year’s earnings estimates) has reached a decade-high level.1 In this scenario, more investors may look at asset classes such as PE for opportunities. PE firms’ ability to add value to their portfolio companies and deliver high returns could attract fresh capital and reinvestments, which may fuel assets under management (AUM) growth. The increased interest could boost PE AUM to US$5.8 trillion by year end 2025, up from US$4.5 trillion at year end 2019, based on a forecast developed by the Deloitte Center for Financial Services (for more details, see the sidebar, “Methodology”).

Despite an optimistic forecast, it does not guarantee success for all PE firms. Firms that exceed the expectations of three key stakeholders—their employees, portfolio companies, and limited partners (LPs)—will likely benefit the most. This paper forecasts PE AUM growth and explores how PE firms can deliver on each key stakeholder’s expectations, supported by insights from a survey of portfolio companies.

COVID-19 presents opportunities and challenges

The COVID-19 pandemic offers PE firms an opportunity as well as a challenge to deploy the record US$1.4 trillion in dry powder.2 While the first quarter of 2020 saw little change in the number of deals closing compared with the previous year, in the second quarter, the market tried to assess the effects of COVID-19 on potential investments. As many deals for business- and consumer-facing companies were put on hold, the four-quarter rolling median EV/EBITDA multiple for US buyout deals jumped from 12.9 in Q1 2020 to 15.2 in Q2 2020.3

As PE firms deploy their dry powder in the second half of 2020, they appear to be taking a very close look at the future prospects of target businesses and portfolio companies. COVID-19 pandemic has created a unique situation—corporate problems right now go beyond liquidity stress. They include impact on business dynamics such as supply chains and consumer behavior.4 This environment has led to deal activity remaining strong for businesses with low or positive impact. Meanwhile, some potential sales of companies with less certain futures have been put on hold.5 Considering the uncertainties around a second COVID-19 wave and consumer spending, some PE firms are adopting a wait-and-see approach for new investments, but with this approach comes the risk of missing an opportunity to deploy dry powder.6 To support existing portfolio companies, PE firms are actively working with them to manage through the pandemic and facilitate success.

Apart from fresh investments, firms can add value to existing portfolio companies by providing additional financing and expertise. PE firms’ financial backing and expertise is helping some portfolio companies navigate through the pandemic and the resulting economic disruptions. Nearly one-half (47%) of respondents in our survey of portfolio companies either received or expected fresh investments from their PE investor during the pandemic. Another 15% received assistance with debt refinancing.

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