Private Equity Activity Expected in the Remainder of 2020

While there is no question that the first half of 2020 was challenging as we all adjusted course, multiple experts feel that private equity activity may perk up in Q4.

Economic uncertainty slowed things down in Q1 and Q2, greater availability of credit, as well as a focus on add-on acquisitions and innovation, may begin to fuel a recovery, according to a report released by PwC this summer. They tell us that low levels of activity were to be expected through Q3, but that is because the new deals emerging as part of our current recovery were unlikely to close before Q4. According to Preqin data, PE firms had over $1.7 trillion of dry powder to spend as of this summer. PwC expects that this capital will be put to work sooner rather than later.

Leading consulting firm Bain’s observations support the PwC report. As the largest provider of due diligence to private equity firms worldwide, Bain’s diligence work can be seen as a leading indicator for deal-making globally. They report that after steep declines from March through May, June due diligence work rebounded sharply, and there’s optimism that investment will pick up throughout the second half of the year. 

Why the uptick? No one is completely sure, but they believe it is because investors and business leaders are treating our current economic downturn much differently than our last one. While the global financial crisis of 2008 exposed painful structural problems in the global banking system, COVID-19’s shock has been more like a natural disaster. It is powerful, but it doesn’t reveal an underlying economic weakness per se. Bain believes the real risk is if the pandemic affects consumer activity for long enough to drive an economic crisis. The market doesn’t seem to expect it to.

Goldman Sachs Group Inc.’s Co-Heads of Global M&A Dusty Philip and Michael Carr, are forecasting the same rise in activity in late 2020 – with a focus on technology, but also on badly hurt sectors such as energy, where companies must transact to stay alive.

“What we have learned from the past is that sharp declines in the M&A market have led to sharp recoveries, so we’re expecting a strong second half with higher levels of M&A,” Philip said. “The vast majority of discussions are on hold but many clients remain in a strong position and on the front foot with respect to deploying capital for M&A.”

Given the abundance of private equity money currently sitting on the sidelines and buyers actively in the market waiting for prices to drop, has resulted in competition for the best opportunities. This competition is helping to drive valuations up which could ultimately end up bringing more sellers back to the market in the last few months of the year. If you are considering buying or selling a business, contact us for a confidential discussion of possibilities appropriate to your specific situation.