Over the prior 10 years, the total value of North American PE transactions grew more than threefold from its low point during the Great Recession, and deal counts held steady at more than 12,000 per year. In addition, the level of uninvested capital (“dry powder”) reached record levels of near $2 trillion USD globally, a sizable savings account that reflected a growing investor appetite for excess returns from PE portfolios.
In effect, PE had raised more money than it could invest in new portfolio companies, and the performance of existing funds continued to attract new capital. A “PE bubble”—from overpaying for a reduced supply of target companies—seemed to be the main possible storyline on the horizon.
Of course, all storylines were rewritten with the arrival of the COVID-19 pandemic. In just a few months, the tides turned dramatically, and PE ownership became a potential burden for companies seeking stimulus funds, deal volumes were greatly reduced, and some PE firms abandoned high-profile target companies. To compound these developing challenges, many PE managers lacked the freedom to target distressed companies and “buy low” due to portfolio risk limits and fewer acquisition targets.
THE NEW PRIVATE EQUITY OPPORTUNITY
Where does that leave PE firms and their portfolio companies? In our view, quite well-positioned, particularly compared to privately owned, competing companies. In fact, given the widespread industry disruption that’s already occurred and the significant uncertainties ahead, creating value in existing portfolio companies might be more critical now than at any time in recent memory.
The combination of dry powder, strained PE
portfolios, and crippled investment strategies
create a tremendous opportunity for fund managers
to refocus on an unexpected opportunity: their
existing portfolio companies. We present a
framework for evaluating and executing the right
investments, and recommendations for both PE
firms and portfolio companies to navigate these
investments together.
By practicing agility to adjust and adapt to portfolio
companies’ shifting needs, and with strategic
deployment of capital in the right places, PE firms
can guide their companies — and their funds—to
outsized performance.
Download this PDF