Private Markets Outlook 2021
Triggered by the COVID-19 outbreak and the closing of the economy, private equity activity entered a "risk off" mode between the end of February and May 2020. Sales processes were delayed and global buyout volumes in Q2 2020 plunged by 40% year-on-year. The gap in valuations between what buyers were willing to pay and what sellers expected weighed on activity, on top of the physical distance challenges faced when conducting due diligence and closing transactions during lockdown.
Debt markets have since reopened and capital markets have rebounded. However, investment volumes and valuation levels remain bifurcated across sectors. Resilient, high-margin assets with growth visibility are in high demand and, consequently, trade at premium valuations, often exceeding pre-COVID-19 levels.
The nature of investment opportunities that we are pursuing in a post-COVID-19 environment has not changed but sharpened. We continue to look for resilient, high cash-flowing assets with above-average profit margins and growth potential driven by secular trends.
This is especially the case for companies that have embraced or are facilitating the transition toward a digitized economy and certain segments within the healthcare sector, with IT software and essential health services being prime examples. At the other end of the spectrum, multiples and investment activity in industries that were severely impacted by the pandemic remain subdued, including client-facing business models reliant on high customer volumes, such as airlines and hospitality. Similarly, highly levered, cyclical businesses require a return premium to compensate for increased uncertainty. We expect this dispersion to continue.
Dynamics within a single sector can vary greatly as has been clearly demonstrated by recent events, depending on whether the business offering of an individual company is client-facing versus remote, digital versus traditional, or bespoke versus off-the-shelf. High-level sector categorizations such as "healthcare" or "consumer" have lost some relevance as a result.
As we look at opportunities, we are focusing on the visibility of organic growth, consolidation potential and downside protection. In this context, we may accept higher prices if we have a strong conviction about future growth resilience.