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While in recent years, private equity has experienced a real boom and succeeded in attracting institutional and professional investors alike, the marked slowdown in growth since the beginning of 2020 is likely to continue, and will probably be exacerbated by the global health crisis.
Is private equity losing its appeal?
An attractive alternative allowing for good portfolio diversification, private equity, – whether invested directly or through investment funds – has proven popular with both institutional and professional investors for several years now. This very private asset class has got people talking, despite it being inaccessible – if not impossible – to the general public. Established companies have been acquired by major private equity firms mainly with a view to being restructured, reoriented and made profitable, only to be sold afterwards, generating significant capital gains in the process. Other funds have focused on start-ups, primarily tech firms, some of which have proven to be veritable unicorns.
However, this trend seems to have suffered a serious setback. According to the Centre for Management Buy-Out Research (CMBOR) , H1 2020 recorded a 39% drop in private equity transactions in Europe compared with the same period in 2019. The total figure of 205 transactions is even lower than the 207 recorded in 2009. The decline in the value of these transactions is less marked, at around EUR 41 billion (-7%).
Which sectors have been affected by the COVID-19 health crisis?
Nearly one third of all transactions involved tech, telecoms and media companies. This is not surprising given that these sectors have been able to glean some benefit from the health crisis. The same is true for the healthcare, logistics and consumer goods sectors. On the other hand, the aviation, tourism, hospitality and leisure sectors have been severely affected overall, and the final impact is still hard to judge.
The medium-term effect on the real estate sector is also proving difficult to gauge. The almost immediate and large-scale switchover to working from home demonstrated not only a swift response to a new environment, but also the technological and human capacity to adapt to this new situation. Many companies in the services sector were therefore able to keep their business running, finally coming to the realisation that it’s not always necessary for all their staff to be on site at all times. As a result, office space will naturally free up as leases expire. The trend moves towards more people working from home in the coming years will obviously have other consequences, especially for local businesses and mobility.
What does the future hold?
On a positive note, companies in sectors currently experiencing the highest demand are of course benefitting greatly, with some reporting exceptional earnings: valuations are skyrocketing. However, it is still extremely difficult to assess a company’s real medium and long-term value just because it has been able to respond very quickly to immediate demand and needs. One such example is that of industrial companies that have switched from core production activities to building hospitals or producing sanitary equipment in record time. While such a swift reaction is proof of great agility, with rapid decision-making and implementation capabilities, it still does not represent a sustainable medium or long-term vision.
For sectors most affected by the crisis, a major investment would currently be of greater support for this sector than a calculated bet on the recovery and return to a similar (or even greater) level of activity at the end of the crisis.
All this may go some way in explaining why, according to CMBOR, some USD 1.5 trillion in capital committed to private equity remains uninvested. In other words, investor demand largely exceeds market supply. However, uncertainty stemming from the crisis and valuations in certain sectors are calling into question and delaying investment decisions.
In conclusion, private equity is seemingly experiencing a hiatus, although this has not dampened the sector’s entrepreneurial spirit in the least. It is undoubtedly better to be in a cash-rich position on the look-out for good investments than the other way around. And private equity funds could well prove to be valuable financial partners in the implementation of major government stimulus initiatives, many of which have made sustainable green transition a central theme.
 Imperial College Business School, London