Private Equity Amid the COVID-19 Downturn

by: Atta Tarki  Ken Kanara & Gustav Brown


Key Highlights:

ECA Partners today announced survey results of over 100 Private Equity (PE) professionals on how the COVID-19 downturn is impacting their strategic priorities.


Selected findings include:

  • PE investors are on average spending 47% of their uninvested funds to strengthening existing portfolio companies, a 7% increase
  • 27% of PE investors plan to do more deal sourcing than before COVID-19
  • Most investors expect PE revenues to return to pre-COVID levels by Q4 2020 or Q1 2021
  • Investors have a positive outlook on the future. Investors on average believe the Dow Jones Industrial Average will rise by 10% over the next 12 months



ECA Partners earlier this week conducted a survey of more than 100 private equity investors and executives to understand how the COVID-19 emergency and consequent economic downturn are affecting investment decisions in the private equity sector.


Private equity in the United States accounts for more than $1 trillion in value and employs approximately 9 million Americans, with more $600 billion in wages earned in 2018. It has been one of the main drivers – and beneficiaries – of economic expansion since 2009. Like other sectors of the economy, however, PE-owned companies have been deeply affected by domestic closures and other restrictions enacted in response to the COVID-19 outbreak, as well as from the disruptions to the global supply chain, ongoing declines in global trade, fast-rising unemployment and general loss of consumer confidence that define the current economic climate.


Our survey posed a series of questions to PE investors and executives on the following themes: (1) how the COVID-19 emergency has changed their strategic priorities; (2) how they plan to spend uninvested capital; and (3) when they expect company revenues to return to pre-COVID-19 levels. It is comprised of more than 100 respondents from various corners of private equity: tenured committed funds, family offices and fundless sponsors, ranging from small ($0-100m assets under management) to very large (more than $10b assets under management).


Survey responses suggest a significant shift away from active investing to maximizing value at current holdings – both by controlling costs and finding new avenues for organic revenue growth. Despite this shift, the survey finds that new investments remain the number one destination for uninvested capital, signaling that many PE firms see investment opportunities in the current economic climate. Finally, survey respondents do not foresee a prolonged economic depression, but rather an economy set to rebound by the end of 2020 or first half of 2021.


Taken together, these findings suggest that PE investors are focused both on weathering the proverbial storm and setting their investments up for rapid growth once the economy rebounds.


1. Time Allocation

We began by asking PE executives to compare (a) how they plan to spend their time over the next 90 days to (b) how they allocated time during the recent period of economic growth. Virtually, all respondents (87%) told us that they plan to spend more time managing costs at their portfolio companies. Some investors are already shifting their focus on offensive strategies, including spending more time fundraising (14%) and sourcing deals (27%).



These findings show that, in relative terms, PE investors are shifting strategic focus from mergers, acquisitions and divestments to ensuring that their existing holdings are able to successfully weather the storm and emerge from the downturn.


2. Uninvested Capital

The second set of questions focus on how PE firms plan to allocate uninvested capital. Overall, new investments remain the top destination (54%) for uninvested capital. However, this is down from 62% pre-COVID-19. Respondents largely plan to reinvest the difference in organic value creation initiatives, either to manage cash or grow revenues –from 12% before COVID-19 to 21% over the next 90 days. Inorganic growth opportunities, such as bolt-on acquisitions to existing platform companies will keep being allocated about a quarter of the uninvested capital.



3. Revamp Prediction

Finally, we asked respondents to predict when portfolio company revenues should return to their pre-COVID-19 levels. A plurality of respondents (29%) believe this will occur in the first quarter of 2021, with nearly as many (27%) eyeing the fourth quarter of 2020. Only a small percentage (8%) believe the recovery will occur more quickly or expect (9%) a prolonged recession that will go deep into 2022.



Overall, private equity investors have a positive outlook on the future. Investors on average believe the Dow Jones Industrial Average will rise by 10% over the next 12 months.



4. Respondent Breakdown

The survey offers a snapshot of private equity in the United States. Respondents hail from tenured committed funds (66%), family offices (12%), fundless sponsors (14%) and other vehicles for private equity investments (8%).


Respondents also range in terms of assets under management (AUM). Representatives from funds under $100m AUM account for 36% of respondents, while those in the $100-500m AUM range account for 30%. Another 8% of respondents come from funds in the $500m-1b AUM range, while 18% come from funds in the $1b-10b AUM range and 8% from funds with more than $10b AUM.


Respondents also represent a range of private equity activities, from fund-level investments (86%) to portfolio operations (60%).




Based on these findings, it is clear that private equity investors are placing more emphasis on value creation at existing portfolio companies. The idea is both to help those companies weather the immediate storm and set them up for rapid growth once the economy begins to rebound.


At the same time, though PE investors are scaling back their deal making activities, they are by no means curtailing them altogether – by contrast, new investments remain the top priority for uninvested capital. Savvy investors know that, under current conditions, a number of companies with strong fundamentals are temporarily undervalued or cash strapped, making them attractive targets for acquisition – particularly if the estimated timeline for the downturn is one year or less, as it is for 64% of respondents.


While the results underscore the severity of the current economic crisis, they also show that one of the most dynamic sectors of the US economy views the crisis as both temporary and an opportunity. What’s more, they show how decisions made now will propel the recovery as it starts to take shape, either early next year or by the end of this one.





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