BDO has just published its U.S. Private Capital Pulse Fall 2020 Survey which finds that even as they prepare for a second wave of the coronavirus, three-quarters of private equity firms expect the economy to turn around in 2021.
Three-quarters of all fund managers surveyed expect the economy to improve next year—28% expect it to be “much better” and nearly 47% “slightly better.”
Only 15% of private equity and venture capital fund managers surveyed said they expect the economy to perform worse in 2021, and the remainder, 10%, said the economy would fare about the same.
“With the road to recovery shrouded in uncertainty, deal makers are grappling with an unfamiliar landscape,” said Scott Hendon, the national leader of private equity at BDO. “Deal flow will remain comparatively muted for the balance of 2020, but, in line with industry expectations, we believe M&A will pick up as the economy turns around in 2021.”
While transaction activity during the balance of 2020 likely will not catch up to the deal flow seen in 2019, transactions are picking up steam. Nearly half of survey respondents expect private company sales and capital raises to drive deal flow over the next six months with other key drivers including public-to-private transactions (39%), succession planning (37%), exiting current investments (34%) and corporate divestitures (32%).
Last winter, BDO reported that 40% of fund managers saw distressed business deals as a key driver of deal flow, up from 4% the previous year. Now, 46% of fund managers believe investing in distressed businesses will be a key driver of deal flow with acceleration through the end of the year and into 2021 as businesses that are still experiencing disruption deplete their coronavirus federal relief loans.
“Private capital outperformed the public markets during the recovery from the Great Recession, but the asset class was slow to make new acquisitions and missed on the returns that would have come from buying quality assets at a steep discount. If they are looking for an opportunity to correct the so-called sins of the past, now is the time,” said Jim Loughlin, BDO’s business restructuring and turnaround services national leader.
Is a second wave of the pandemic on its way? Yes, according to BDO. Almost 95% of respondents say they are preparing for a second wave of the pandemic and are taking action by conducting business continuity risk assessments (55%), making changes in forward-looking valuation metrics (47%), activating a crisis response task force (39%), considering applying for a government loan (36%), and assessing EBITDA for asset impairments (32%). Just under 5% of respondents say they are not doing anything to prepare for a second wave.
Valuing assets by modeling future cash flows and revenue streams is always an uncertain process but especially so during a global pandemic. According to the BDO survey, more than 77% of private equity managers believe assets today will be valued from 10% to 20% lower than they would have pre-COVID-19. These price dislocations will provide opportunities for higher returns but may require longer holding periods.
“The impact of the COVID-19 pandemic and election season uncertainty have changed the landscape of exit activity. Rather than private-to-private trades between fund sponsors, we are seeing more exits from companies accessing the public markets—that includes private equity shops that before the pandemic may not have considered IPOs as viable exit strategies,” said Kevin Bianchi, BDO’s asset management industry group co-leader. “The IPO pipeline is building, which is perhaps an unexpected outcome of the crisis, and may offset other investment and financing strategies.”
BDO’s private equity practice assists private equity funds, portfolios, venture capital, mezzanine, and buyout firms throughout the fund cycle with all aspects of fund services, portfolio management and compliance, transaction advisory services and exit services.
BDO is a professional services firm providing assurance, tax, financial advisory and consulting services to a range of publicly traded and privately held companies. The firm serves clients through more 65 offices and more than 740 independent alliance firm locations nationwide.
BDO’s Private Capital Pulse Fall 2020 Survey (download the PDF report HERE) is a survey of 100 private equity fund managers and 100 venture capital fund managers at firms in the United States. The survey was conducted by Rabin Research Company, an independent marketing research firm, in August 2020.
Private Equity Professional | October 6, 2020