Introduction
As the COVID 19 pandemic continued to threaten investor sentiments the PE industry was also affected by it. In an increasingly connected world, this is a fact given that the effect of changing trends in one part of the economy is bound to affect trends in another part of the world – a sort of chain reaction. The PE market saw a decline in 2021 in deal-making with the firms becoming more risk-averse and the focus being on stabilizing current portfolio investments.
However, the second half of the year 2021 started seeing more investments with the markets showing more resiliency regions like the Asia Pacific seeing a doubling of the number of investments as compared to 2019. Overall, $628 Bn worth of capital was raised in 2020 which was 20% less than that in 2019.
The dry powder had increased, with the amount swelling to almost $2 Trillion dollars which is close to a record all-time high. IT and healthcare were two of the major focus areas during this time.
Political unrest, the increased adoption of digital technologies, and the increased adoption of ESG are some of the key trends which have been shaping up the industry. This has forced the managers and PE investors to rethink their investments strategies. They have done this by steps such as looking at reshaping their current investment models as well as by relooking at their portfolio investments.
The key to survival in such a scenario is adapting quickly to changing market dynamics, adapting and acting quickly by taking into account the major trends shaping up the industry as well as thinking broadly and executing region and sector-specific strategies. One such example is the adoption of digital technologies so that the entire organization can be on the same page and be swift and nimble to market changes thereby becoming more operationally resilient.
To such an end this exercise would require one to rethink their mandate and investment strategy as well as their business operating models and methods. Greater involvement with key stakeholders and engagement with industry leaders is one such methodology to counteract the ill effects of COVID 19.
Technological changes in themselves is a megatrend impacting all sectors and investments
For us to understand how the Private Equity industry is being affected by the COVID 19 pandemic we must also understand other underlying dominant forces which are shaping up the world.
The Deep Tech revolution
One must have heard of the space race between Blue Origin and SpaceX. Space travel has become a reality and has captured the public imagination. This is one such instance that has seen a diverse and vividly imaginative and technically sound staff coming under one roof to fulfill its mission of space travel.
Quantum computing and the rise of Artificial Intelligence
With the achievement of quantum supremacy as announced by Google and IBM we are slowly but surely entering the age of super intelligence where experts foresee the end of classical computing and Moore’s law with classical computers being replaced by exponentially faster quantum computer cousins. It will soon find its way into automation of services such as credit approval, granting of loans, and automation of several banking processes.
Online security and online data protection
There will also be an increase in rule-breakers when it comes to the world of finance and hence online security and online data protection will be one of the services most in demand.
Cryptocurrency, Blockchain and the world of digital payments
As the internet penetration increases and with adoption and connection by leading technologies such as 4G disruptive services such as cryptocurrencies, blockchain, and digital payments will see a rise. This is evidenced and catalyzed by e-commerce and e retailing which boast of contactless payments to their customers.
Key trends shaping up the global Private Equity industry
It is important to understand the investment trends especially in the US which is the heart of the Private Equity and Venture Capital Industry. Investments by them in startups have increased over the last 20 years yet their rate of return has been below average or just above the average of major stocks listed in the stock markets (even though in the last 10 years they have outperformed the S&P index).
Viewed overall, this is a major problem for the US economy as it not only discounts the innovation premium on which US companies pride themselves but it also affects the investment sentiments of the investors at large.
With this in mind let us look at a few of the latest trends in Private equity investments
Increase in Mergers and Acquisitions
As compared to traditional IPO’s and funding for more traditional ways of organic growth, it is the Mergers and Acquisition route that the Private Equity firms are gravitating towards. One major focus area for this is the insurance sector and the major geographic area are countries like China and India as they ease the rule for participating in their domestic economies.
This trend by the PE/VC firms towards mergers and acquisitions rather than following the traditional IPO route is the primary reason why the returns from investments in startups have been on the decline.
Global Private Equity Trends and its impact on PE returns
Focus on Special Purpose Acquisition Vehicles (SPAC’s)
A SPAC is a company that has no commercial operations of its own and has been raised specifically to raise capital through IPOs to acquire or merge with an existing company.
Just to get an idea of the volume of transactions involved, around $80 Billion worth of money was raised by 247 SPACs in 2020 and this amount went up to $96 Billion from 296 SPACs in 2021.
Lowering of interest rates
The decrease in investments activity has meant a fall in rates globally. The coming year 2022 is expected to show a rise in borrowing activity complemented by a not so rapid rise in interest rates.
The rise of the startup ecosystem
The startup ecosystem will be an area of continued focus which means increased investments in cities like the Silicon Valley and much closer to home cities like Bengaluru and Mumbai. However, PE firms are more likely to stay vigilant and go slow with the focus being on sound financial stability as well as relatively risk-free returns.
By June 2020 the number of Unicorn startups in China rose to 227 rivaling those in the US which had 233. The size of Global Unicorns is close to $2 Trillion which although huge means there is still scope of expansion in other geographies of the world.
Some of the global startups include the fabled FAAMNG (Facebook, Amazon, Apple, Microsoft, Netflix, and Google) which accounts for more than 25% of Standard and Poor’s total market capitalization.
Conclusion
The year 2021 has been a watershed year for us with the COVID 19 pandemic teaching us vital lessons. Companies have not only learned to respect uncertainty but also learned that they need to be nimble and agile when it comes to dealing with real-world situations. Hopefully, these lessons will be remembered by us for generations to come.
About Magistral consulting
Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research.
For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact
About the Author
The article is Authored by the Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com