Private Equity Deal Flow in the Covid-Era: What We Have Learned and Where We Are Going

What We Saw in 2020 - 

​2020 was a year that spanned the activity spectrum in Private Equity. While PE firms entered the year looking to ride the momentum generated in 2019 both on the deal and fundraising front, things came to a screeching halt with the onset of a global pandemic. In Q2 we saw stillness followed by a significant period of uncertainty. Most firms shifted to an all hands on-deck defensive strategy to help their negatively impacted portfolio companies in any way they could. However, the Private Equity industry did not sit back idly and let that become the narrative for all of 2020. By Q3, the initial Covid shock had worn off and activity picked up across the industry.
The summer and autumn saw an uptick in activity as PE firms adjusted to a limited travel Covid era existence.  Now, in Q1 2021, the industry finds itself looking to ride the unexpected momentum that the second half of 2020 provided. The IT, Healthcare, and B2B sectors claimed the majority of 2020 deals, measured in dollars. As illustrated in the graphic below, those three sectors dominated deal flow in 2020, while the B2C and Energy sectors took a significant step backwards. 

The graphic below is representative of the momentum that was halted by Covid in the spring of 2020, and then picked back up in the fall. Despite a global pandemic, M&A activity only declined by 5% by number of deals between 2019 to 2020:

What can be expected across the Private Equity landscape in 2021? 

Deal Flow Will Be Strong
First, we firmly expect the flurry of deal activity to continue through the first half of 2021. With the rollout of Covid vaccines, it seems the most uncertain times are behind us. One glaring data point to support this thesis is the $1.7 Trillion in Dry Powder that the Private Equity industry was carrying into 2021. Capital raised nearly peaked in 2019. That fundraising flurry has surely contributed to the glut of dry powder that exists today, as the Fundraising graphic to the left illustrates.  ​

This deployable capital can be expected to be put to work early and often this year, due in part to the backlog of deal related diligence activity in 2020. With much less Covid-related uncertainty now, we expect more deals close as a direct result of the resumption of diligence activity in Q3 and Q4 of 2020. Deal flow in 2021 will also be supported by a likely increase in corporate carveouts. Many large companies have been dealt a significant blow by the pandemic and a significant number of those companies are continuing to feel the pain, over 11 months since the first shutdowns. While they are still struggling to find their footing early in the new year, Private Equity investors have been patiently sitting on $1.7 Trillion in dry powder. 

Carveout activity has been on a steady decline since 2015. The market is poised for a potential off-trend uptick in carveouts in 2021 and it will be interesting to keep an eye on this in the months ahead. The combination of excess dry powder and large public companies licking their Covid wounds can bode well for opportunistic Private Equity firms looking to close carveout deals as large public companies, especially those struggling, consider all options, including the sale of non-core business units. 

Add Ons Will Be Popular
Now that we have established the rationale for anticipating a deal heavy year, the question then becomes “What type of deals will tell the story of 2021 in Private Equity?” The Private Equity industry seems aligned on the expectation that Add-On deals will be the most common in 2021. In a recent survey of Private Equity professionals conducted by ACG and sponsored by advisory firm Dixon Hughes Goodman, more than 60% of respondents said they expect add-ons to take center stage. If the back half of 2020 is any indication of what the Private Equity landscape is going to look like during and post-Covid, it is worth noting that according to Pitchbook data, add-on deals accounted for 73% of Private Equity buyouts in Q3 2020, the highest number on record. This trend also leads us to believe that Average Deal Size in terms of dollars will remain consistent with the prior decade, with deals under $250M accounting for over 80% of total M&A activity each year.

Founders Will Be Seeking Investments

The propensity towards deal making in 2021 will not just be unilateral with Private Equity firms looking to deploy a glut of dry powder. Family and founder-owned businesses will surely be re-evaluating their openness to sale this year. Even those fortunate enough to survive 2020 with little to no negative impact will still likely have their eyes and ears open as PE firms come knocking.  Baby Boomers are in a position where they may want to finally cash in if the right opportunity presents itself. One third of the US population is either close to, or over, the age of 60. Witnessing the fallout from the pandemic and leading their companies through the storm may very well be the final challenge that leads founders to decide that the now is the time to either sell or assist with a management led leveraged buyout. The combination of this baby boomer population aging and the very real risk of them losing their life’s work due to a global pandemic very much out of their control should incentivize founders who managed through 2020 to cut a deal. 

2021 Will Be a Busy Year for Private Equity, and Treya Partners is Poised to Support Cost Reduction Efforts for New Deals
The newswire in the Private Equity industry will be hot throughout this year and firms will be ready for the action. Coming off a year filled with uncertainty to a degree many have never seen, PE firms are battle tested and ready to take lessons learned and use them to be as opportunistic as possible in 2021.

​Focus on operational synergies and integration will be top of mind for fund managers and they will be making sure they have the resources and tools in place to optimize their buy and build strategies. At Treya Partners, we are prepared to be heavily involved in the deals our Private Equity clients close this year and we will be supporting them through cost reduction and procurement optimization efforts so their teams can focus on the next deal to be had in this opportunistic market.

​About Treya Partners
Treya Partners is a management consulting firm specializing in procurement value creation, strategic sourcing, and spend management advisory services for Private Equity. Treya was established in 2006 by a seasoned group of supply management professionals and has served hundreds of PE-owed companies across a broad range of industry sectors including manufacturing, distribution, retail, financial services, life sciences, healthcare, and technology. Treya delivers meaningful EBITDA improvements from indirect (SG&A) and CoGS categories in addition to implementing transformative procurement projects. For further information, visit Treya Partners online at https://www.treyapartners.com