By Vincent Wess (WHU - Otto Beisheim School of Management)
This report is meant to provide insights on how the COVID-19 pandemic has influenced the private equity industry in the first quarter since the beginning of the outbreak and how the current healthcare crisis will impact the industry going forward. In particular, we will address not only the impact on current buy-out activity but also how other parts of the private equity value-chain, such as fundraising, exits of investments, and fund performance, have been and are going to be impacted.
Section 1: Impact on Buy-Out Activity and New Deals:
In Q1 2020 global buy-out activity measured by deal count has decreased by close to 60% from January to April which compares to a 50% drop in activity in the period following the Financial Crisis
Economic uncertainty, difficult pricing discussions between buyers and sellers, decreases in leveraged bank lending, and lower leverage levels in buy-out deals are the key drivers behind the low levels in buy-out activity in Q1
Section 2: Impact on Investment Exits:
Global buy-out-backed exits have decreased by 72% from January to April in the first quarter of 2020, which compares to a 62% drop from levels seen in 2007 to 2009 in the aftermaths of the Financial Crisis
Declining valuation multiples, uncertainty about the shape of the economic recovery as well as the impact on individual business performance going forward have led GPs to remain on the sidelines when it comes to exiting investments
Section 3: Impact on Fundraising:
In Q1 2020 global funds across all types saw inflows of $287bn which is in line with recent years on an annualized basis
With negative net cash flows to LPs and the denominator effect working against additional capital allocations to PE as an asset class, short-term fundraising conditions are likely to be less favorable than in recent periods
Section 4: Impact on Fund Performance:
In a survey with LPs and GPs globally, Campbell Lutyens finds that GPs and LPs expect write-downs exceeding 15% in funds’ first-quarter valuations
Write-downs at Apollo and Blackstone came in at the low 20 percent levels indicating GPs preference to front-load losses into one quarter
Section 1: Impact on Buy-Out Activity and New Deals
Given the scope of the COVID-19 pandemic and the multidimensional uncertainty that comes along with it, it is impossible to make a precise statement on how buy-out activity will be affected going forward. However, it is possible to evaluate the impact of the pandemic on Q1 buy-out activity and put predictions into the context of the 2008 Financial Crisis, accounting for the material differences between the two crises.
In Q1 2020 global buy-out activity measured by deal count has decreased by close to 60% from January to April. This compares to a 50% drop in activity in the period following the Financial Crisis. However, the full-year effect of the pandemic on 2020 buy-out activity remains highly uncertain as well as the mid-term impact on the industry's performance.
Image: Global Buy-Out Deal Count (Bain report)
What needs to be highlighted is the resilience in activity observed in the European buy-out market, where deal volume in the first quarter has even increased more than 110% year-on-year from €23.2bn in 1Q19 to €48.9bn in 1Q2020, according to data from Mergermarket.
Image: European Buy-Out Activity Quarterly Breakdown (Mergermarket)