PE institutions more comfortable doing deals in a pandemic, pension funds want change to co-invest
A Torys LLP study of private equity players and pension funds suggests they are looking optimistically towards making deals in 2021 and are especially interested in pouring money into technology companies.
The survey of more than 100 executives at PE institutions and pension funds found that 76 per cent of them plan to increase or maintain the amount of capital they put into private equity funds in 2021.
“The private equity and pension fund professionals who responded to our survey expect to see an overall improvement in the transaction environment that will drive dealmaking and fundraising activities throughout the year, despite uncertain global economic conditions as the pandemic persists,” the survey commentary says.
“I think the industry has figured out that they can work in this environment, that they can meet their targets,” says Guy Berman, a Torys partner who advises private equity funds. “They know they can do things by video call, and do their due diligence, get to know the company there are interested in, the business and the people.”
Research company Ipsos conducted the second annual survey in November and December. It found most fund managers had an optimistic view. That’s despite some investor concerns over putting money into public companies that are commanding high valuations.
“The majority of respondents believe the relative outlook for 2021 will be much improved,” the private equity survey found, especially in contrast to the challenges of 2020.
“More transaction volumes, better debt-financing terms and heightened [mergers and acquisitions] activity are all expected, and year over year, twice as many respondents also anticipate it will be easier to raise new funds in 2021.”
Michael Akkawi, head of the firm’s PE practice, noted how much cash private equity and pension funds are sitting on. “There’s so much capital allocated to these classes . . . and that capital needs to be deployed, so they are out there looking for the best opportunities in the current environment.”
The Torys survey also found that 34 per cent of money managers expect the tech sector to offer the best investment opportunities. In contrast, just 17 per cent of the investors who took part in a similar Torys survey the previous year said the tech held the greatest promise. “Technology remains the sector of choice for dealmaking opportunities in 2021,” the survey said.
The most recent study suggested private equity funds expect to put more money into businesses tied to agriculture (including pet care), entertainment, and personal care and services. One example in the agriculture-related sector is the $1-billion-plus purchase of veterinary clinic firm VetStrategy by Boston-based Berkshire (not Berkshire Hathaway).
The study said “these shifts in sectors of focus can be partly attributed to changes in consumer behaviour driven by the ongoing pandemic.”
Both Berman and Akkawi say that one interesting bit of intelligence that came from the survey is that when pension fund managers were asked what their most important term was in investing in a private equity fund, it was the right to co-invest in any deals that the PE fund made. These co-investment opportunities would allow the pension funds to put additional capital into investments without incurring additional fees and the chance to deploy even more capital into a solid deal.
“What’s really behind that is, when you look at the uncertainty of the markets, I think there’s a feeling that private equity over the long run tends to do perform very, very well,” Akkawi says.
The prospect of more money chasing private businesses has raised concerns that funds may end up overpaying for acquisitions. More than 80 per cent of executives surveyed by Torys say they are concerned that deals playing out this year will overvalue companies. The pension fund managers who answered the survey are expecting higher multiples.
However, Akkawi says that just because PE might have a lot of dry powder, “by nature pension fund and PE managers are conservative, and don’t want to pay inflated valuations.” Berman adds the “key thing” is keeping a close eye on companies they are interested in and building the relationships, so a potential deal doesn’t end up in an auction process.
Despite the positive outlook, the survey suggests that challenges persist. “Competition for new investment opportunities continues, valuation multiples remain high, and some businesses that have shown COVID-19 resilience are commanding a premium,” the survey says. “And the ongoing disruption caused by COVID-19 is influencing deal terms, with four out of ten respondents expecting to see the use of earn-out provisions to address valuation gaps.
“Although our survey results reflect the resilience and optimism in Canadian private equity, the pandemic crisis is not over yet, and most respondents identified it as the top challenge for 2021.”