As the agenda increasingly turns to economic recovery, Private Equity will provide much needed liquidity for some businesses to facilitate growth.
So how will the coronavirus crisis impact private equity investments and the wider M&A market? This was a key question going into and during the early parts of the COVID-19 pandemic.
Initially, the unprecedented national lockdown had a sweeping impact on the majority of private equity deals and M&A activity with widespread disruption caused to almost all parts of the economy and society. This was evidenced by UK Gross Domestic Product (“GDP”) which provides a measure of the economic performance, contracting by 2% in Q1 of 2020 (Jan-Mar) and by 20% in April according to the Office for National Statistics. The April GDP contraction was less than most economic forecasts that predicted up to 30% contraction, which evidenced the resilience of the UK economy during lockdown.
The impact on M&A for both trade buyers and private equity investors has been slightly different.
The M&A market witnessed a downturn in trade acquirer activity and this is likely to be a feature of the next 3-6 months as corporates focus on liquidity rather than acquisitions. The good news is the various Government Loan schemes and availability of equity from public markets has meant corporate balance sheets are on the whole in decent shape and that should in part drive UK economic recovery and in time further M&A. Some corporates may also seek to divest any non-core activities during this time to increase liquidity and streamline their commercial focus.
Within private equity, there was an initial shortterm impact in the immediacy of lockdown albeit private equity deals have still taken place and we are witnessing a steady increase in private equity activity, especially in resilient sectors such as healthcare, technology-enabled businesses, e-commerce, food services, financial services, communications and IT, driven by large availability of capital.
The key driver of private equity investment and appetite is the quantum of dry powder in the market – recent estimates of which are c. $2tn. Many private equity houses either raised new funds pre COVID-19 and in some cases during the pandemic, including August Equity closing a £300m fund, Elysian Capital first closing at £270m fund and Tenzing raising a new £400m fund. Other PE funds are also in the process of raising fresh capital so the availability of capital is expanding not contracting at this time.
Private Equity fund deployment has centred around new investments as well as strategic bolt-ons for existing investments. Earlier stage investors such as venture capital and VCT funds remain active in pursing new investments.
With the availability of large pools of capital and equity funding, the interest in resilient sectors is accelerating during this period despite the mediumterm economic uncertainty, largely due to these sectors proving resilient during COVID-19 pandemic. Funders are keen to support businesses with the need for working capital funding, development and growth capital, businesses wishing to pursue an M&A strategy and also shareholder liquidity for owners who are seeking to de-risk and exit part of their shareholding.
Transactions that have concluded during the pandemic include the carve-out of Doby Verrolec backed by Chiltern Capital, the acquisition of Returnloads.net by Mandata which is backed by LDC, the investment in Chill Insurance by Livingbridge and BGF’s investment in IT migration software provider Juriba.
This has also been a busy period for Cavu CF, having recently advised H.I.G Capital on the acquisition of Vernacare, a manufacturer of healthcare hygiene products and a supplier to the NHS from Palatine Private Equity, followed more recently by advising Vernacare on a strategic acquisition its first under H.I.G ownership. In addition we have advised a leading mid-market private equity fund on a new investment again in the Healthcare space making that three private equity transactions over the last few months. Given the huge amount of capital in the market looking for a home, this makes it an ideal time to consider equity funding given equity terms are highly competitive and the cost of capital at a historic low. Specialising in the private equity markets has been a key theme over the last seven years at Cavu CF and we look forward to working with businesses over the coming months if they are interested in exploring a private equity investment.
