No matter what sector you are in, a level of re-evaluation is happening as lives and businesses adapt to changed priorities and new ways of working and interacting. Ogier Partner Richard Daggett explores how these changes are shifting the focus for investment and private equity
The level of dry powder in the market continues to be record-breaking. In June 2020, Preqin estimated that around $1.45trn of dry powder was available to private equity funds to invest in the full spectrum of companies, real estate, infrastructure, natural resources and debt.
Q3 and Q4 of 2020 look set to be exceptionally busy on the private equity front. According to advisers, the stockpile of money raised but unspent is set to be used in an unprecedented spending spree.
However, as is always the case, dry powder is not always about the high-profile acquisitions. The ongoing investment by funds into their portfolio companies is what generates the long-term returns on exit.
The use of dry powder is also not always about the growth of a company, it is sometimes about keeping a company going when times are tough.
Investors will be analysing their portfolio with a fine toothcomb to determine whether a company has long-term prospects and a strong base despite current difficulties or if that investment would only serve to alleviate short-term problems.
Dry powder used effectively now on a company in difficulty but with robust fundamentals is dry powder well spent.
In these times, that does mean hard choices are having to be made about investment in the sectors that have borne the brunt of the pandemic’s hardest blows.
The hospitality, travel and retail sectors are among the most obvious casualties of the lockdown and the continued uncertainty over the shape of things to come. In each case, investment will depend on how viable a business will be in a post-Covid world.
The picture for businesses that don’t have the capability to adjust and innovate to cope with restrictions and behavioural changes is bleak.
However, there are examples of portfolio companies hugely benefiting from PE backing during this time due to their ability to scale up quickly through investment and to take advantage of a large surge in demand due to the lockdown.
Some PE-backed companies have focused on activities that have received renewed interest during our enforced confinement (home crafts, food delivery, home physical exercise). And tech-focused companies have taken advantage of our move to living, working and socialising through screens.
No doubt they are thankful for the investment in them to date and for the swift deployment of dry powder in recent months to avoid missing any opportunity to profit during the sharp spike in demand for their services.
Investors may also be re-examining deals they considered too expensive just months ago.
However, there is no use in pursuing a deal for a target simply because it is now within the investor’s price appetite and, again, analysis of longevity in the wake of the pandemic will need careful consideration.
It may well be a case of quality over quantity, but there is also a case for well-placed firms to act quickly to harness the greatest returns.
That leads to one big difference that is likely to be seen between the private equity response to the 2009 financial crisis and now – the speed with which the PE industry will react.
While we saw investors slowly make investments in 2009, they were tentative and often slower than perhaps they would have been with hindsight. The funds that moved fast in the last recession were the ones that enjoyed double-digit returns.
It is likely that the lessons learned from the financial crisis will not be forgotten when the investment taps are turned on for the remainder of 2020.
• This sponsored article was first published in Businesslife's City Edition 2020