Oct 8, 2020, 3:18 PM ETInterview, Fireside Chat

The Private Equity Landscape

Institutionalization of Asset Managers: Large alternative asset managers have expanded into multiple business lines (credit, real estate, insurance) over the last decade, integrating financing, sourcing, and operating experts to enhance competitive advantage.
Long-Term Investment Horizon: The typical holding period for private equity businesses remains 4–7 years, allowing portfolio companies to ignore quarterly earnings pressure and focus on long-term cycle management.
Market Composition Trend: There is a documented long-term trend toward an increase in private companies and a corresponding decline in public companies.
Specialization Strategies: While some firms operate broadly, specialized private equity firms focus exclusively on high-growth technology sectors (particularly software) or specific geographies, maintaining targeted focus.

Pandemic vs. Financial Crisis Response: During the 2008 Financial Crisis, private equity firms acted defensively to save existing positions; during the pandemic, clients proactively managed portfolio businesses to support revenues and cut costs.
Supportive Policy Environment: Private capital clients benefited from robust fiscal and monetary policies following the 2008 crisis, a lesson applied effectively during the pandemic.
Sector Exposure: Private equity portfolios largely avoided consumer discretionary, oil, and gas sectors, which mitigated losses during the pandemic compared to other asset classes.
Limited Partner (LP) Behavior Shift: Unlike the 2008 crisis where LPs withheld capital, current LPs are actively encouraging private equity firms to deploy capital into growth companies and distressed assets alike.
Low Interest Rate Flexibility: The prolonged low-interest rate environment has reduced pressure on firms to achieve the historical 20% Internal Rate of Return (IRR), allowing for flexibility in transaction structures and lower hurdle rates.

IPO and ECM Growth: Initial Public Offering (IPO) and Equity Capital Market (ECM) activity is up 75% compared to the previous year, driven by a rebound in investment-grade and high-yield markets.
M&A Recovery: Mergers and Acquisitions (M&A) activity has returned to robust levels after a quiet start to the pandemic, with pre-COVID processes resuming and new bilateral conversations initiated.
Seller Demand: High demand exists to sell assets in fintech, software, pet care, and healthy consumer sectors, partly driven by sellers attempting to close deals before anticipated 2020 tax changes.
Buyer Aggressiveness: Buyers are adopting opportunistic and flexible postures, willing to execute partial sales, pre-IPO transactions, and various capital structures to meet seller goals.
Exit Vehicle Diversification: Sellers are utilizing a broad toolkit including whole-company sales, partial sales, crossover raises, IPOs, and Special Purpose Acquisition Companies (SPACs).

Volume and Capital: SPACs represented 45% of all IPO new issue volume in the reporting year, with 185 SPACs representing $58 billion in capital actively seeking deals.
Strategic Fit for PE: Private equity firms are uniquely positioned to raise SPACs due to their existing deal-sourcing capabilities, with some clients raising multiple SPACs over time.
Future Outlook: The firm expects a continued and increasing trend of portfolio companies exiting via SPACs rather than traditional IPOs.
Product Evolution: Continuation vehicles are becoming more active, allowing for the recapitalization of Limited Partners where some shareholders exit while new capital enters.

Private Lender Growth: Private lenders have replaced the virtually non-existent public second lien market, performing well during the pandemic through covenant amendments and debt restructuring.
Resilience of Financing: Debt-funded dividend recapitalizations, previously unimaginable, have occurred recently, demonstrating the strength of the private credit market.
Capital Deployment: Private lenders are aggressively seeking capital to fund transactions, offering private equity firms flexible funding options alongside public lenders.
Digital Execution: The industry has fully adopted virtual tools, including Zoom-based IPO roadshows and M&A processes, and the use of drones for factory tours to facilitate deal execution during the pandemic.

Diversity Mandates: Goldman Sachs requires that any company it takes public must have a diverse board member; clients are setting specific goals of one to three diverse board members.
Performance Correlation: Diverse boards have been shown to positively impact investment performance for private equity clients.
Impact Capital Deployment: With $859 billion in dry powder, clients are increasingly directing capital toward impact funds focused on electric vehicles, alternative energy, sustainable farming, and diverse-owned businesses.
Strategic Priority: The integration of Environmental, Social, and Governance (ESG) criteria and inclusivity is becoming a core focus for the future of the private equity business model.