2021
Private Equity
Market Outlook

Private equity activity finished 2020 strongly after the discovery and initial rollout of vaccines boosted confidence and added fuel to the investment recovery. Between October and end-December, global deals hit $155 billion1Global buyout deals chart

Source: Preqin
, according to Preqin data, making it the busiest quarter since 2007. Deals included PAI’s purchase of German facilities management group Apleona from EQT for €1.6 billion2PAI Partners to acquire Apleona from EQT

Source: Private Equity Wire
and the £3.8 billion take-private of G4S by Allied Universal3G4S board agrees £3.8bn takeover bid from Allied Universal

Source: Financial Times
, backed by investors including Warburg Pincus and Caisse de Dépôt et Placement du Québec (CDPQ).

While there is still a great deal of uncertainty around the distribution of vaccines and ultimately their effectiveness, the investment recovery reflects the long-term views of private equity sponsors and their investors who are looking through the crisis at accelerating trends and opportunities. We expect an active 2021 for many funds across many industry sectors.

Distressed Opportunity Drivers Multiply

Large-scale monetary and fiscal support helped companies avoid insolvency during the shutdowns and recession of 2020 by supporting salaries and providing grants and loans to cover other fixed costs. While such funding enabled many businesses to survive, distressed investment opportunities are likely to become more evident in 2021, when weaknesses in capital structures or business models are likely to be exposed. Some potential drivers for distressed opportunities include:

  • Increased cash demands on businesses as they attempt to ramp up production or restart operations, leading to liquidity crunches
  • Reduced government support packages
  • Reined in lender forbearance as non-performing loans increase
  • Slowing economic recovery as unemployment continues to rise and pay freezes are introduced
  • Uncertainty and disruption caused by Brexit and volatility in exchange rates

Private Investment in Public Infrastructure

Infrastructure investment is often regarded as a central plank of any stimulus or government-led investment plan. The recovery from COVID-19 is unlikely to be any different and will be given greater impetus by renewed focus on carbon reduction targets at the UN’s climate gathering – Cop26 – in Glasgow this year. However, the sources of funding may be very different.

Government borrowing ballooned throughout 2020 putting many treasuries even deeper in the red. The UK’s public sector net debt had increased to almost £2.1 trillion5UK government deficit soars to record high on pandemic borrowing

Source: Financial Times
at the end of November and represented 99.5% of GDP6OBR forecasts 'lasting' economic damage from Covid-19: Spending Review

Source: Financial Reporter
, according to data from the Office for National Statistics. With finances strained, governments are seeking to stimulate private sector investment into infrastructure. In his November review, UK Chancellor Rishi Sunak outlined plans for an infrastructure bank which would invest alongside private investors via loans and guarantees7UK public sector borrowing hits record high

Source: Financial Times

Public sector finances, UK: November 2020

Source: ONS
. France is similarly focusing on green infrastructure in its €100 billion “France Relance” plan, with almost a third to be spent on ecological transition, including green hydrogen8France launches €100bn coronavirus recovery plan

Source: Financial Times
.

Deal Structures will Remain Flexible

Bank debt is likely to remain plentiful and cheap. Central banks have continued to guide to low interest rates for the foreseeable future, which should underpin low borrowing costs for businesses. However, more flexible hybrid funding structures – such as preferred equity or loan notes with warrants – flourished during the disruption caused by the pandemic and are likely part of the private equity toolkit in 2021. We expect flexibility to be a key focus for sponsors even as deal sizes pick up.

Any outlook comes with caveats – this year more than most. The recovery’s momentum will depend greatly on vaccine roll-out across Europe. Economic risks, as well as political challenges in the US and Europe, and the prospect of tax rises to bring down deficits, could also play into business and investor confidence. However, there is light at the end of the tunnel and pent-up demand for European investments. This could narrow the valuation gap between buyer and seller expectations and drive a strong year for private equity investment in 2021.

Michael J. Preston
Partner

London
T: +44 20 7614 2255
mpreston@cgsh.com
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Gabriele Antonazzo
Partner

London
T: +44 20 7614 2353
gantonazzo@cgsh.com
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Michael James
Partner

London
T: +44 20 7614 2219
mjames@cgsh.com
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