As an asset class, private equity continues to perform robustly, with venture capital seeing a standout year on the back of enthusiasm for technology and healthcare, writes Zainab Mansoor
The year 2020 was an outlier. With a global health crisis at the fore and its economic implications spreading across businesses worldwide, various industries were put through a wringer. However, the private equity (PE) space weathered the tide, despite short-term disruptions caused by the Covid-19 pandemic. “The year in private equity was marked by volatility and resilience. While fundraising declined overall and across most sub-asset classes, it rebounded vigorously in the latter half of the year. Buyouts and growth equity bore the brunt of fundraising decline. VC (venture capital) had a standout year on the back of enthusiasm for technology and healthcare,” states the McKinsey Global Private Markets Review 2021.
The private equity investment performance outpaced that of other private markets assets for the fourth consecutive year, based on year-to-date pooled net internal rate of return (IRR) as of the third quarter of 2020. After a sharp decline in performance in the first quarter, private equity recovered quickly to post a nine-month trailing pooled net IRR of 10.6 per cent through September 30, the report added.
“As it has for the last decade, PE as an asset class continues to outperform other private markets asset classes, as well as public market equivalents, by nearly all measures. Among PE sub-asset classes, VC continues to outperform buyouts at the median but sees greater performance dispersion. A significant driver of VC’s strong growth in 2020 was the prominence of healthcare VC, which enjoyed record fundraising growth of 70.5 per cent.”
Meanwhile, Bain & Company’s Global Private Equity Report 2021 also revealed that the broad technology sector attracted the most PE investment in 2020 (29 per cent of total buyout deal count globally). Funds gravitated toward Saas-based businesses with particularly sticky business models, like vertical software.
“The financial sector also drew significant private equity interest despite the slumping economy, which typically hits the sector hard. Insurance didn’t see much activity, while the payments sector was on fire. The secular shift to digital payments, that was already well underway, got a Covid-19 boost when retailers and consumers alike backed away from cash in favour of cards and other forms of online payment. Deals involving payments companies made up 24 per cent of total financial services/ fintech investment value in 2020, up from 16 per cent the year before,” the report said.
Regionally as well, the technology and healthcare sectors fared well as investors doubled down on funding to foster growth. MENA venture capital funding crossed $1bn in 2020 for the first time,
The broad technology sector attracted the most PE investment in 2020, accounting for 29 per cent of the total buyout deal count globally
up 13 per cent from 2019, according to a MAGNiTT report. Total funding into the e-commerce sector rose by 24 per cent to $162m, while the F&B and healthcare sectors more than tripled their total funding to $122m and $72m respectively.
Industry stakeholders harbour similar sentiments in terms of sectors of growth; 95 per cent of institutional investors and family offices in an annual survey commissioned by Bahrain’s Investcorp named automation, digitisation and artificial intelligence (AI) as the top trend they feel will shape the global economy over the coming decades. Aging population (69 per cent), climate change (65 per cent) and personalised healthcare (60 per cent) were listed by investors as the second, third and fifth highest-ranked trends, respectively. The firm recorded investment activity of $1.4bn in H1 FY21 driven by two new private equity investments in the US and Europe, two add-on acquisitions and other investments. Meanwhile, its placement and fundraising totaled $1.6bn in H1 FY21.
Responsible investing has come a long way from being an esoteric concept to a mainstream concern with companies maturing in key areas to take important decisions. Private equity, similar to the rest of the business ecosystem, is paying heed to growing trends of sustainable investing in an attempt to build an equitable society and address environmental concerns.
PwC’s Global Private Equity Responsible Investment Survey 2021, that weighed the views of general and limited partners in responsible investment among 209 global PE firms, revealed that private equity is acknowledging ESG (environmental, social and governance) as a driver of value creation. Up to 56 per cent of firms said ESG features in board meetings more than once a year, while 15 per cent said it was discussed at all board meetings. Meanwhile, 72 per cent always screen target companies for ESG risks and opportunities at the pre-acquisition stage, and 66 per cent rank value creation as one of their top three drivers of responsible investing or ESG activity, the survey added.
With investors harbouring a stronger risk appetite and private equity firms leaning towards change, the PE space seems well poised to leverage opportunities going forward. As the McKinsey report aptly puts it: “In some respects, the PE industry in early 2021 strongly resembles the picture a year earlier: robust fundraising, rising deal volume, elevated multiples. But for the institutions that populate the industry, transformation has come faster than ever, accelerating old trends and spawning new ones.”