Private Equity in 2021 — Which Way Will It Go?
COVID-19 shows no signs of abating around the world. It has claimed lives and jobs, people are worried about their futures, geopolitical concerns are on the up — the impact is wide-ranging and scary.
Private equity (PE) is far from unscathed. Of the 150 PE managers responding to an Intertrust survey in Spring 2020, about 70 percent expected the investment outlook to deteriorate over the next year, significantly or otherwise. The uncertainty is palpable!
How has the private equity market responded to the crisis?
Equity markets have no doubt been bolstered by massive capital injections by central banks into financial assets, far outpacing the amounts in the 2008 crisis. The markets are, in fact, not much lower than at the same time last year, and the record highs in dry powder position PE firms to grow their share of the global economy. This could, however, be a mere smokescreen, obscuring a more informed view on companies that could sustain through to the new normal.
What are the important trends in private equity?
Some of the trends seen in the PE sector are as follow:
- Record highs in dry powder: estimated at USD 2.44 trillion by data provider Prequin
- Expansion across strategies, sectors, and geographies: Beyond buyout firms concentrated on the US and Europe
- Higher demand for marketers with specialized skillsets
- A surge in environmental, social, and governance (ESG) and impact investing
- Higher interest in middle-market operators: Nearly 200,000 companies in the middle market, hence more investment opportunities
An important shift has been toward digitization. Andreessen Horowitz in May 2020 said that in a matter of months, firms were seeing two years’ worth of digitization. PE firms are leveraging digital power for process automation, data aggregation for better visibility over portfolios, and business activity monitoring, among others. Even PE portfolio companies have seen immense gains from digitization with improved processes and hence growth, as well as more operational efficiency.
How are private equity portfolio companies being handled?
The crisis has led to different responses from PE firms toward their portfolio companies. Some are redirecting them toward future growth paths, others are betting on cost cuts, while yet others are either hibernating businesses with enough reserves or transferring control to banks so they can better focus on what lies ahead.
What have been the changes in private equity sector and location exposure?
PE firms now have approximately USD 5.7 trillion in assets under management (AUM), of which 95 percent is concentrated in 20 sectors and subsectors and more than 50 percent comes from real estate, energy and utilities, business and professional services, software, industrial equipment and machinery, and healthcare. Market capitalization fell across all sectors and recovered in some.
Is a clear recovery expected?
Recovery will happen, but its shape and duration remain indeterminate. The financial crisis of 2008–09 led to structural and trajectory changes in most industries, with P/E multiples recovering fast, slow, or not at all. The recovery this time around will be different, and sectoral and macro aspects will bear on its nature. The pandemic has changed the direction of most sectors, with further changes likely. Here is an illustration of how different aspects of business could be affected:
How have private equity operations changed?
Remote work was a first for PE, and it is now the de facto mode of operation. Virtual meetings have proven to be very effective, and their usage will grow, especially for due diligence. Travel has reduced and will likely stay low for a while, and communication and sharing through online collaboration tools will be the norm. The need for a personal touch makes these modes difficult to work with, as relationships must be built and maintained even from afar, but firms are learning to adapt.
What changes have come about in private equity hiring?
COVID-19 has meant a spike in PE demand for restructuring professionals, as only a third of the work of PE firms has gone on hold. PE performance has far surpassed other asset classes, and hiring by PE has been boosted by this growth — hence a large number of available private equity jobs. Investor relations is another highly sought area of expertise, important to boost relationships with limited partners (LPs) and ride through tough times.
There is also a high demand for diverse talent as well as for people specialized in ESG and impact investing, new focus areas for careers in private equity. Some PE firms have, in fact, mandated their recruiters to have at least half the candidates from a diverse background, often accompanying this with diversity audits and quotas. Adding competition to the hiring space is the demand for talent from wealth management firms, which seek candidates with similar attributes.
Of course, candidates must be tech-savvy so that they can work with all the tech tools. They have to be able to motivate their team members and keep the investors comfortable too.
How can candidates boost their chances of being hired?
Candidates for private equity jobs at the top PE firms can boost their chances immensely by taking up certifications. A certification is an attestation of the candidate possessing the latest skills and know-how in the PE domain. It shows the candidate is serious about growth in a career and is capable of taking on higher roles and responsibilities.
Here are some of the best certifications to take for great careers in private equity:
- Certified Public Accountant (CPA): This is offered by the American Institute of CPAs (AICPA). A CPA license allows the person to offer advice on financial goals for businesses, individuals, businesses, and other entities.
- Chartered Financial Analyst (CFA): From the CFA Institute, CFA is a good choice for skills required in investment banking and PE. The holder has strong skills in analyzing investments as well as high standards of ethics and professional behavior.
- Chartered Private Equity Professional (CPEP™): CPEP™ is offered by the United States Private Equity Council (USPEC). It gives a candidate the knowledge and appeals that leading PE firms look for. Based on the rigorous USPEC IFIS™ body of knowledge, CPEP™ prepares candidates for excellent performance in their jobs, giving them top skills. It is a great way to start or accelerate careers in private equity.
To sum it up…
The 2020s could be a great opportunity, despite the havoc wrought by COVID-19. Deal-making may slow down in a while, but hiring should stay strong, boosted by the launches of private credit funds. PE firms must strengthen their operations and be ready for what lies ahead!
