Brief : Spear Capital’s Bryan Turner reflects on the last year and analyses the impact of the pandemic on private equity. Over the past year or so, we’ve all become familiar with a whole host of terms we knew nothing about at the start of 2020. “Lockdown”, “rate of transmission”, and “social distancing” all entered our collective vocabularies. At the same time, we had to get used to new ways of working and doing business. That’s as true for private equity (PE) as it is for any other sphere of business. And, initially, it looked like the economic devastation wrought by Covid-19 would hit global private equity markets incredibly hard. But after falling off a cliff in April and May, deal and exit value snapped back vigorously in the third quarter. Even as the mass rollout of vaccines around the globe brings a glimmer of hope that life may return to some semblance of normal, it’s likely that the conditions of 2020 will be with us for some time to come. It’s therefore imperative that private equity firms, their investors, and the firms they fund use the lessons of 2020 to inform their approach going forward.
Brief: Since its inception and unstoppable spread of Coronavirus across the globe, the investors feared it as a “tail risk”, but not anymore! The latest survey of global Fund Managers by Bank of America (BofA) shows that the global pandemic Covid-19 is not the major cause of worry for the fund managers, instead the inflation and the “Taper Tantrum”. In the survey for March by Bank of America (BofA), Fund managers view higher-than-expected inflation (37% of the total investors) and a tantrum (35% of the total investors) in the bond market can pose a danger to the market, making the market less attractive and worrisome to investors. 220 investors with $630 billion in assets under management were polled between March 5 and 11, showing the mean cash balance increasing to 4.0% from 3.8%, hedge funds’ net exposure to equities ticks highest since June 2020, and hedge fund allocation to commodities is an all-time high. The survey says, 48% of the fund managers expect the economy of the world, which includes Indian economy, to deliver a V-shaped recovery, as compared to only 10% in the May 2020 survey.
Brief: Private equity firms are paying more for leveraged buyouts to keep pace with soaring valuations of acquisition targets, making some investors leery of whether the industry can keep delivering on promises of lucrative returns. The booming stock market and cheap debt financing have helped push leveraged buyout prices to a record high, driven by sectors that have grown as people work and stay at home during the COVID-19 pandemic, such as technology and business services. Private equity firms paid an average 13.2 times a company's annual earnings before interest, tax, depreciation, and amortization (EBITDA) for U.S. leveraged buyouts in 2020, an all-time high, up from 12.9 times in 2019, according to financial data provider Refinitiv. Some investors are growing concerned about whether buyout firms can deliver the 15% to 20% annual returns they target when they raise new funds. "We can tilt towards better valuations and opportunities," said David Holmgren, who oversees $3.5 billion in endowment and pension assets at Connecticut-based hospital system Hartford HealthCare. He said he has been shifting his portfolio away from private equity funds that invest in pricey buyouts to those that specialize in middle-market deals and emerging markets.
Brief: Hedge fund clients of Centaur Fund Services performed strongly in 2020, according to data released by the independent fund administrator. The company says that increased market volatility caused by the Covid-19 pandemic, optimism over vaccines, US elections and huge government stimulus programmes created a set of opportunities for hedge funds to prove their worth, and on the whole, they responded well. Almost 10 per cent of Centaur's clients generated returns in excess of 50 per cent, with nearly 25 per cent of our clients posting gains of over 20 per cent. In addition, more than 35 per cent of our client portfolios grew between 10-20 per cent. While most strategies produced positive returns, the stand out performers tended to focus on equity long/short based strategies with strong gains in a number of sectors including technology, emerging markets and healthcare. Centaur's data set is broadly in line with published industry data.
Brief: Tech venture capital investment in the UK hit a record high of $15bn (£10.8bn) in 2020 despite the economic fallout of the coronavirus pandemic and complications of Brexit, a new study revealed. According to Tech Nation's latest report, health and wellness companies raised $38bn in 2020, an increase from $28bn in 2019. The report quoted UK prime minister Boris Johnson as stating that: "In North West England we saw an increase in health tech investment of over 200%, while across the UK our digital sector continues to make an enormous contribution to fighting the pandemic: from connecting locked-down patients with their GPs to offering NHS staff free access to workplace mental health platforms." He added that 2020 was "a year in which the brutal necessity of restricting human contact has escalated the importance of tech of all kinds, from the NHS app to Zoom calls." Augmented reality, e-sports and gaming accounted for over $2.4bn of total venture capitalist investment to companies including US-based Caffeine, which raised $126m for their gaming, entertainment and creative arts broadcasting platform.
Brief: One year into the pandemic, research suggests that for the majority of Canadian venture capital (VC) firms deal activity has increased or remained relatively consistent, according to a recent survey conducted by OMERS Ventures. In January, OMERS Ventures, the tech-focused investment arm of OMERS, one of Canada’s largest pension funds, surveyed 99 VC firms across North America and Europe, 24 percent of which were Canadian. Given that the pandemic is likely going to have a lasting impact on the way that VCs evaluate companies for investment, OMERS said it decided to share its findings to help the community adapt. The new report, which was released today, follows OMERS’ July 2020 survey and aims to illustrate how VC behaviour and activity have changed due to COVID-19. “We felt now was a good time to conduct our study once again, to capture current sentiment around how VCs are approaching investing today, and any lasting changes we should expect to see in the deal process in a post-COVID world,” wrote Alyssa Spagnolo, associate at OMERS Ventures. Of the Canadian VC firms OMERS spoke to, 46 percent have seen the same amount of deals compared to before COVID-19, while 25 percent have seen more deals than normal. On the flip side, 21 percent have seen deals decline by at least a quarter, while eight percent have seen deals decline by at least half.