Private equity managers will exit 2020—a year of volatile uncertainty and widespread calamity for many regular Joes—with $1.7 trillion in dry powder, a third-quarter rebound in buyouts ($148 billion—10 percent higher than last year) and an outlook for rich deal opportunities in 2021. On Tuesday, global law firm Dechert, whose private equity practice advises alternative asset managers on activities including fund structuring, investment negotiations, transactions, and deal exits, released its 2021 Global Private Equity Outlook, which captured the prevailing mood of optimismamong private market investors.
Produced in conjunction with market intelligence firm Mergermarket, the report was based on a third-quarter survey of 100 senior-level executives at PE firms with $500 million or more in assets under management (excluding first-time funds).
Mergermarket surveyed 100 senior-level executives within PE firms with over US$500m or more in assets under management (and not first time funds) based in North America (45 percent), EMEA (35 percent), and Asia-Pacific (20 percent). The survey included a combination of qualitative and quantitative questions.
What, PE worry?
“There is good reason to expect that full-year 2020, while below average compared against the heights reached in recent years, may not be so weak as widespread lockdowns and economic disruption might suggest,” the report concluded, adding that only one in ten respondents said they expected fundraising to be negatively impacted by covid-19 related suspensions.
Sixty-one percent of respondents said their firm had raised a fund in the last 12 months, or was currently in the process of raising one. Among those who answered affirmatively, the single-largest fundraising challenge that these firms reported (26 percent) was “convincing investors that their capital will be put to work quickly.”
”The large asset managers have been continuously fundraising for their many strategies and for them, fundraising has not changed, apart from the fact that the process now has a large virtual component, which had already been in the making for several years,” the report found. “Sponsors and limited partners have adjusted rapidly to the covid-19 situation and this is a continuation of a pre-pandemic development.”
The outcome of the recent U.S. election had little impact on private equity’s outlook overall. While 58 percent of respondents had said they believed a would-be second term for Donald Trump combined with Republican congressional control would have the most positive impact on the PE market, a clear electoral result for President Elect Joe Biden also is a relief for dealmakers.
Diversification desired
Looking ahead to 2021, asset class diversification is high on the agenda for private equity, with more than half (57 percent) of respondents. saying they definitely or likely plan to diversify their exposures next year. Only six percent indicated that the option was off the table.
Their reasons for doing so varied broadly, with 29 percent saying they want the advantages of larger scale, 28 percent chasing higher returns, and 24 percent indicating interest in new asset classes from their investors.
Among would-be diversifiers, the most-desired asset class is “specialized or niche segments”—one example being Blackstone’s thematic life sciences fund. Nearly a third (32 percent of yes-respondents) ranked this as their top choice for new asset class exposure, followed by private debt/direct lending and impact investing, which drew top rankings from 23 percent of respondents planning to diversify in 2021.
APAC: Resilient, but concerned
Impacts of covid-19 have varied widely by region, the report found, with Asia-Pacific PE seemingly impervious to the effects of the pandemic. Global Private Equity Outlook reported $80.5 billion in buyout deal activity across the APAC region in the first three quarters of 2020, which actually marked a 13 percent increase over the same period in 2019. The largest share of this activity—$33 billion invested—was concentrated in TMT (technology, media and telecommunications) deals.
“In certain industries, the pandemic is still having a large impact, but by and large, in Asia, Covid-19 is quite contained and well dealt with,” said Siew Kam Boon, a PE partner in Dechert’s Singapore office. “In many countries in the region, people are more or less going about their lives as normal and restrictions are loosening.”
She said that TMT’s robust performance in Asia Pacific in 2020, along with pharma, medical and biotech deals, is expected to continue through 2021, with a number of deals likely being in the distressed and corporate carve-out spaces.
“There will also continue to be a push to expand into impact investments and growth investments for a number of the Asian sponsors,” she said.
Despite the region’s relative resilience—which has been attributed to its willingness to impose strict early lockdowns, mask-wearing, and track-and-trace measures—Asia-Pacific private equity respondents expressed concerns over the broader geopolitical and trade landscape. Half of APAC executives surveyed said the U.S.-China trade conflict would have the biggest effect on the deal environment over the next 12-18 months (45 percent said “impacts of the covid-19 crisis” would have the biggest effect).
Additionally, new foreign investment rules set by countries including India, Japan and Australia could add “new dimensions to trade considerations” in the APAC region.
