Riverside’s Pam Hendrickson: Pharma, medical, biotech and ‘anything that involves digitization’ draws PE

'The challenge is sifting through the Covid noise and determining what is permanent versus temporary,' says Hendrickson.

On the heels of a banner year, do private equity professionals expect the momentum to continue in 2022? Which sectors will offer the biggest opportunities? How will covid affect dealmaking? What about inflation? What role will ESG play this year? PE Hub has asked leading private equity pros these questions, and we’ll be publishing their answers over the coming days. To kick off our series, here are insights from Pam Hendrickson, vice-chairman of The Riverside Company.

2021 was a record year for private equity. Will the momentum continue in 2022? What forces are driving activity?

We expect the dealmaking environment to continue to be very strong. During the past two years the importance of technology has been highlighted, and this significant digital transformation in our economy will continue to create a lot of opportunity in the M&A markets. Add-ons, carveouts and spin-offs will likely accelerate, whether they are related to a need for cash due to effects from covid-19 or to growth opportunities from digitization. Another force driving activity in PE-backed M&A is the significant limited partner investor commitments that continue to flow into PE funds, all of which need to be deployed into companies. Finally, while some inflationary pressure is likely, credit will remain readily available for good deals.

Which sectors are most promising?

Pharma, medical and biotech are continuing growth sectors for M&A, especially as the healthcare industry is quickly evolving. Anything that involves digitization, or a disruptive technology is interesting. The education and training sector, in particular, is likely to have a significant number of opportunities resulting from digitization. The challenge is sifting through the covid noise and determining what is permanent versus temporary. For example, if a company has suffered supply chain disruptions and is moving to diversify suppliers, what is the P&L impact?

What challenges do you see ahead? What keeps you up at night?

Regulatory issues will be a big challenge in 2022 – everything from antitrust and merger control to ESG regulation to disclosure requirements. Increased regulatory scrutiny, plus more complex due diligence, will be challenging to navigate. Also, technological inefficiency and cybersecurity will remain challenges, especially for small firms that may not have the requisite resources.

How will the hybrid work model affect deal origination and closing?  

The hybrid work model has increased efficiency in many ways. Deal origination, developing industry insights and building relationships will still require some in-person work, but diligence streams and closing deals will keep getting more efficient remotely. The acceleration of efficiency brought on by the hybrid model is exciting.

How will PE’s increasing focus on ESG affect dealmaking in 2022?

For PE, it really should be “GSE,” because typically, if one can get the governance issues correct, then the other areas tend to follow. But there is little data in this area, and there are few benchmarks for private companies regarding ESG. So, while it is a focus for the industry, the number one question PE investors want to answer will be, “Am I buying a business where I see significant growth opportunity during my hold period?” At Riverside we want to improve everything about a business during our hold period, including its ESG marks.

What are you most looking forward to?

Reconnecting in person with other Riversiders, LPs and leaders at our portfolio companies.