The first half of 2020 saw a drought in dealmaking due to economic uncertainty and tighter credit markets, but PE-backed M&A activity is set to pick up in the second half of the year.
Greater availability of credit, the prioritization of value creation through add-on acquisitions, and a sharpened focus on new technologies and innovation are fueling that recovery, according to a recent report by PwC.
“The pandemic led most private equity firms to turn quickly to address value creation,” Andrew Cristinzio, US private equity sector leader at PwC, said. “There are deals to be made, and PE should recover in the months ahead, but firms that pivot quickly now and work with what they have could be the big winners.”
The value and the volume of transactions closing during Q2 fell to $144.1 billion across 785 deals, down from $182.5 billion across 1,390 deals in Q1 2020, according to PitchBook data.
This decline can be explained by PE firms switching gears to support their existing portfolios through the downturn, according to the report.
The low level of activity is likely to persist through Q3, as new deals emerging through the recovery are unlikely to close before Q4, the report said. Alternative strategies such as joint ventures and distressed debt are growing in popularity. That said, PwC expects to see a comeback of leveraged buyouts in the last quarter of the year.
Private equity firms have over $1.7 trillion of dry powder as of July 2020, according to Preqin data. This capital will find ways to be put to work, says PwC.
“While leveraged buyouts drive the majority of PE investing activity, we can expect an increase in add-on opportunities and strategic partnerships to drive near-term investing for PE, while leveraged buyouts will gain momentum during the end of the year,” the report said.
TMT, healthcare overshadow retail and consumer
PwC expects to see an increase in investing across TMT – technology, media and telecom – in the coming months. The pandemic has driven more interest in innovation and scalable technology, while the overall sector has shown more recession resiliency relative to other industry groups. That’s attracted even more PE investment than seen before the pandemic, according to PwC.
“The current environment has led to faster adoption of new technologies and behavioral changes, such as contactless purchasing and workforce management and some of these can be here to stay,” the report stated. “This has already shaped investing in public equities markets, and we expect PE firms to remain focused on these areas, which could lead to more early stage and growth investments.”
Healthcare will also remain an important focus for private equity dealmaking, fueled by renewed interest in the sector’s importance and the potential for consolidation and strategic partnerships, according to PwC. The pandemic has spiked demand for telemedicine providers, innovative services platforms, and tech-focused forms of healthcare, the report said.
Elsewhere, retail and consumer deals declined in the first half of the year due to pessimistic consumer sentiment and spending, according to the report.
However, PwC said the sector may see a rebound in M&A as consumer spending revived and online buying increased in the early summer. Companies in retail and consumer will focus on M&A that drives near-term innovation and cross sector investing, PwC forecasted. Strategic mergers and buyouts can lead to some win-win scenarios as companies adjust to shifting consumer preferences across the industry, PwC said.
Correction: The story was corrected to reflect that private equity firms have over $1.7 trillion of dry powder as of July 2020, according to Preqin.