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On Wednesday, financial data and research provider Pitchbook released its 2020 Annual U.S. PE Breakdown Report, an analysis of private equity market activity in the U.S. during the pandemic year, and a glimpse of how 2021 may be shaping up for the industry.

Per Pitchbook’s findings, U.S. PE investment activity totaled $708.4 billion in 2020 (down 7.3 percent from 2019) across 5,309 separate deals (down 3.4 percent), marking the first decrease in both private equity value and number of transactions since 2009. But exit values came in much better expected in 2020, with $378.3 billion generated across 952 exits: an increase of 6 percent in value, against a 14 percent decrease in total exits from 2019. Against this backdrop—particularly given the resilience of IPO’s (which accounted for 8 out of the 10 biggest private exits in 2020) and the runaway popularity of special purpose acquisition companies (or SPACs, the “blank check” companies that raised more money in 2020 than in all the years of the previous decade combined), PE turned in a pretty good year.

“2020 was a rollercoaster of a year across the board, but the private equity ecosystem proved resilient,” said Wylie Fernyhough, senior analyst and PE team lead at PitchBook, upon the report’s release on Wednesday.

The report identified several noteworthy pockets of resilience for private market investors in an often volatile and unpredictable year.

Like what?

Growth equity investments—which target companies transitioning from venture capital funding to the more traditional buyout phase—were a major driver of overall deal value, with PE investment in this this subsegment hitting $62.5 billion in 2020. This is the highest deal value on record, and an increase of almost 9 percent above 2019, despite a decline in overall deal activity.

Pitchbook notes that growth equity as a PE strategy has gained considerable momentum in recent years, reflected in a threefold increase in deal activity since 2009.

“Often characterized as a middle ground between venture capital and leveraged buyouts, growth equity attracts investors because it promises the opportunity for strong returns while limiting downside risk,” Pitchbook analysts wrote.

In 2019, they note, PE behemoth Blackstone hired General Atlantic’s Jonathan Korngold to launch their own platform for growth equity investment, what Blackstone CEO Stephen Schwarzman called “a highly synergistic expansion area,” and emblematic of the growth equity’s full integration into the private equity mainstream.

What’s more, while growth equity was generally robust in 2020 across all sectors, it was particularly strong in tech, a sector that benefited directly from the shift to remote life-work-spend during the pandemic. IT growth equity deals alone totaled $20 billion in 2020, up 72.4 percent from 2019 ($11.6 billion).

Minority stakes

Pitchbook found that private equity firms are increasingly willing to make minority investments in mature, PE-owned companies, particularly using growth equity financing, as was the case with Bay Grove Capital’s cold-storage portfolio company Lineage Logistics, which raised a whopping $1.6 billion in September on the back of a robust demand outlook for temperature-controlled vaccine storage.

“A greater proportion of PE funds now target or are willing to target non-control investments than before the GFC, and they are using this strategy in a broader variety of sector and target company contexts,” Pitchbook wrote.

During the otherwise downbeat second and third quarters, PE firms also pursued a number of non-controlling PIPEs (private investments in public equity) deals, which have historically shown heightened investor interest during times of market stress. PIPE activity tends to pick up in uncertain market environments, as listed companies seeking to shore up balance sheet liquidity connect with PE firms looking for opportunities to deploy capital at a slow time for buyouts.

In April and May, Pitchbook noted, both the NYSE and NASDAQ temporarily waived their so-called “20 percent rules,” which require companies to seek shareholder approval for private financing deals representing more than 20 percent of their existing stock or voting power, a move that supported PIPE volume.

Add-ons—or the buying and adding of smaller companies, often through serial acquisitions, to a larger platform company— were also a significant driver of deal activity. In 2020, add-ons accounted for 72.5 percent of all buyouts, an all-time high, topping the previous record of 68.5 percent from 2019.

Dry powder

Pitchbook’s data of March 31, 2020 shows U.S. PE firms holding more than $550 billion in dry powder less than two years old. Even with the election over and a relatively positive outlook for vaccine rollouts, many firms are still hesitant about putting this capital to work.

The research firm says one reason for the reticence is the expectation that PE will continue to be under increased scrutiny given the industry’s sheer heft—global AUM now exceeds $2 trillion— and the role that private equity funds play in the broader economy.

Even for privately held companies whose financial difficulties result from pandemic-related externalities, Pitchbook predicts that PE-backed bankruptcies in the coming quarters may give extra ammunition to lawmakers looking to clamp down on private equity buyouts. Regulations around who is ultimately responsible for the debts of bankrupt companies could change the math around prospective leveraged buyouts heading into 2021.

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