In the first half of 2020, Private Equity deals fell by 36% year-over-year due to the COVID-19 pandemic – with buyouts falling by 60% in Q1 alone.
However, with an estimated $1.5T in dry powder on the sidelines and a pent-up demand for deals, in the back-half of the year, we saw a resurgence of deals – with Q3 hitting record-breaking deal levels – and no sign of activity slowing down.
Market Trends Impacting 2021 Deal Activity
The market is now primed for PE investors to put their money to work, which means an increase in competition – and therefore, deal multiples – as well as a need for speed to close.
Buyouts Expected to Reach Record Prices:
In PitchBook’s 2021 Private Equity Outlook, it was predicted that 20% of buyouts will be priced above 20x EBITDA. As price multiples in both public and private markets show no sign of coming down, and as buyout funds increasingly target growth-stage technology companies that come with a much higher price tag, PE investors now need to put a stronger focus on due diligence to identify opportunities for value creation.
Carve-Out Value Poised to Hit Highest Levels on Record:
Because of the economic strain brought on by the COVID-19 pandemic, many large public companies are putting all options on the table for survival, including the carve-out of non-core businesses.
Increased Speed of Bank-Led Auctions:
As industry competition becomes increasingly aggressive, the time frame for bank-led auctions is becoming more compressed, putting pressure on Private Equity investors as the road to conviction on a deal takes a fast track, which creates a higher risk posture when landing deals.
The Evolution Of Technology-Driven Value Creation
In the context of the market environment, Private Equity firms are changing the way they assess, purchase, and transform their investments. Technology has certainly played a role in most value creation playbooks over the last decade, but as a result of ongoing lockdowns, technology has become foundational to driving value across the ownership lifecycle — from diligence to exit.
Due Diligence Goes Virtual:
As government lockdowns and social distancing guidelines went into place, Private Equity firms had to shift to a remote work environment while fundraising, sourcing, and landing deals. This led to the rapid implementation of remote work technology – a critical, virtual solution for investors when identifying risks and opportunities in a potential deal – especially as it relates to IT and technology. As we continue into 2021, despite the introduction of vaccines, we anticipate that virtual due diligence is a trend that will stick as the industry continues to lean into technology transformation.
De-Prioritization of Back-End IT Creates Technical Debt:
As the pandemic accelerated digital transformation for all businesses, many prioritized the implementation of front-end digital software (eCommerce, virtual event platforms, etc.) vs. back-end infrastructure. This often creates integration issues for businesses whose legacy software hasn’t been updated in decades – and therefore, has the potential to disrupt exit paths and returns on current investments.
Increased Focus on Digital Transformation:
As a result of macro events in 2020, all businesses are now digital. Whether a start-up, middle-market company, or large enterprise, the growth potential of a company now lies in the strength of their technology infrastructure. And as companies with higher digital maturity achieve ~30% higher net revenue growth and net profit margins, it will be critical for Private Equity owners and operators to continue leaning into technology – both back-end, foundational IT infrastructure and innovative front-end customer solutions – as a key lever for value creation.
How Private Equity Firms Can Maximize Value With Technology
As a proven technology partner to Private Equity firms since 2003, we recognize that times have changed. That’s why Performance Improvement Partners is evolving our technology offering to meet the needs of modern Private Equity owners and portfolio company management teams.
We’re expanding our team and capabilities to continue designing and delivering technology solutions to increase understanding, maximize potential, and outsize outcomes across your ownership and investment lifecycle.
Evaluate – Assess potential, identify opportunities and risk, and maximize investments. Increase understanding around the technology levers you can pull to create value.
Envision – Devise a technology-driven business transformation strategy that maximizes potential, mapping each metric to create an optimal plan.
Evolve – It’s simple. You need to outperform. Achieve value creation through technology implementation – and ultimately digital transformation – to outsize outcomes.
While we are modernizing our offering to meet your needs, we remain relentless in our pursuit to exceed your goals and are 100% accountable for our work – and the results.
Our purpose is to be your go-to partner in business transformation.
Our promise is to deliver technology-driven value creation.
And we’re ready to start driving value together, today.