The pandemic presented unprecedented challenges, and like many other industries, the private equity industry was not immune. However, despite the market uncertainty, PE firms have navigated the new 'normal' by adjusting their operating models and proving agility and resilience.
2021 was the PE industry's most active year, as PE firms in the US alone invested more than $1.2 trillion, a 64% increase from the previous record set in 2019. Experts believe that 2022 will see equally strong funding activity, with some long-term trends that persisted through the pandemic and other new ones introduced as a response to it.
Here are the top 5 trends that will impact the private equity landscape throughout 2022 and beyond:
1. Adoption of disruptive technologies
Disruptive technologies like DLT (distributed ledger technology), NLP (natural language processing), and RPA (robotic process automation) can play a significant role in helping managers achieve cost savings. For example, NLP can expedite the deal-making and due-diligence process, allowing managers to analyze large data sets much quicker. Similarly, RPA can facilitate firm-wide efficiencies in investor and regulatory reporting activities.
In 2022, an increasing number of private equity managers are expected to forgo manual processes in favor of new technologies.
2. Earnouts are here to stay
Earnouts have proven extremely helpful against unexpected pandemic-related challenges by allowing PE firms to delay payments of the total purchase price until a target company exceeds certain thresholds. At the same time, they provide the target company the opportunity to secure a substantial bonus payment if and when the company surpasses the threshold.
As M&A activity continues to grow at a staggering pace, strategic carve-outs are also expected to gain more popularity over the coming years.
3. More socially responsible investing
Climate change is an increasingly real and concerning problem, and investors are growing more and more interested in how companies promote environmental sustainability. In fact, 60% of private equity executives in North America expect a significant increase in LP scrutiny of ESG issues over the next three years. There is also a high focus on racial and gender equity, as investors increasingly look to invest in women-led and minority-owned businesses.
According to Christophe De Vusser, Head of EMEA Private Equity at Bain, “ESG increasingly impacts cost structure. We see an increasing amount of ESG-backed loans. You can attract better talent if you have the right ESG profile. If you look five years down the road, it’s going to be bigger. It’s important to work on this now.”
Rest assured, private equity will continue to incorporate ESG factors into their decision-making processes in 2022 and beyond.
4. PE firms are going public
As the lines between public and private markets continue to blur, many private equity companies are taking advantage of the sky-high valuations to go public. US-based TPG, a PE firm that went public this year and was valued at $9 billion in its IPO, is a great example.
“If there is one thing most people agree that private-equity firms are good at, it is knowing when to sell. Why not themselves?” - Peter Morris, an associate scholar at the University of Oxford’s Saïd Business School.
5. SPACs are sinking
SPACs, or special-purpose acquisition companies, have been around for years but recently burst onto the scene in 2020 as a new and attractive way to publicly list startups in the US. Unlike traditional public offerings, SPACs allow retail investors and professional money managers to put money into startups simultaneously, making it a more “modern and accessible” alternative.
However, once the pandemic’s hottest trends, the hype around SPACs is now cooling down. There is a rising risk of tighter regulation and shares of half of the companies that completed SPAC deals in the last two years are down 40% or more, erasing billions of dollars in market cap. Investors are learning the hard way that funding startups may not be for everyone. With inflation and interest rates likely to rise, all speculative investments are taking a hit.
Get on board
Although some volatility and uncertainty still remain, the way the PE industry successfully adapted and navigated uncharted landscapes suggests it is well-positioned for 2022 and beyond.
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