Private Equity Sentiment Update: Key Takeaways from Recent Conversations

For nearly 30 years, Harris Williams has forged strong and deep relationships with the world’s leading private equity groups (PEGs). In today’s virtual environment, our senior bankers have made intensive efforts to stay closely connected with their private equity colleagues, offering advice and soliciting input on current market conditions.

“Private equity groups are telling us that while broader economic conditions are improving and they have a strong desire to deploy capital for new platform investments, opportunities for high-quality businesses remain scarce,” says Bob Baltimore, managing director and co-head of M&A at Harris Williams. “At the same time, we’re hearing that many portfolio companies are recovering more quickly and to a greater extent than many expected, which is encouraging to sellers. Overall, we expect to see improved deal flow for the rest of the year.”

Here, we share the key takeaways from our most recent conversations with leading global PEGs.

Sentiment improving, yet deal activity remains below normal

As Baltimore notes, the number of pitches and deals in recent months is increasing, but volumes are still below pre-COVID-19 levels. Among the deals coming to market, PEGs report the composition of their deal flow includes more carveouts, situations with significant complexity, and distressed businesses that are often coming from nontraditional sources.

Additionally, for the past several months, the majority of situations seen by the private equity universe have involved noninstitutional owners. “Many family- and founder-owned businesses that may not have been sellers pre-COVID-19 are now considering a sale,” notes Bruce Kelleher, a managing director with Harris Williams, who works across all of the firm’s industry groups to deepen our relationships within the private equity community.

Kelleher also says sellers are likelier today to be conducting market checks with narrower, more targeted groups of buyers that can offer a higher degree of certainty. Based on the firm’s most recent conversations, PEGs are anticipating that activity levels for quality businesses will rise in the fall, and most want to be active buyers and/or sellers during that period.

Quicker recovery than expected, exit timing in play, credit availability a key factor

Many PEGs have indicated that their portfolio companies are recovering more quickly than they would have anticipated a few months ago—including those impacted meaningfully by COVID-19. Specific outperforming sectors include:

  • Software
  • Direct-to-consumer businesses
  • Building/DIY products/home improvement products
  • At-home products and décor
  • Good-for-you/weight-loss foods and beverages
  • Industrial services
  • Industrial technology and automation
  • Environmental services
  • Safety and regulatory-driven product manufacturers and distributors

While many PEGs are extending timelines on portfolio companies they had planned to sell in 2020, others are considering accelerating exits—particularly in technology and software businesses. Many of the businesses still slated for 2020 exits have only been impacted moderately by COVID-19, and the majority have returned to pre-crisis performance levels.

“Several PEGs have told us that access to debt financing is the gating item to a full M&A market recovery,” says John Neuner, managing director and co-head of M&A at Harris Williams.

Neuner adds that Harris Williams has seen a consistent recovery in the lending market, and that many PEGs have noted that lenders seem to have an increasing appetite for larger transactions.  Additionally, he says lenders have been more willing to support add-ons for existing credits that substantially increase scale than they have been to underwrite new credits. “That said, recent PEG and lender conversations indicate that the financing markets should continue to recover for larger and smaller credits as more quality companies enter the market.”

Despite challenges in the credit markets, PEGs are finding ways to get leveraged buyouts closed. “We have heard from some PEGs that they are proactively working with their top lenders to get clear guidelines upfront from credit committees on diligence considerations and underwriting requirements,” adds Baltimore.

Groups adapting to virtual dealmaking

gettyimages-1248900496.jpgEssentially all PEGs have indicated they are completing as much of their diligence virtually as possible. For some, the virtual environment has enabled deal evaluation and pursuit to become more efficient.

“Some PEGs have noted that virtual processes are enabling them to prescreen more deals at a deeper level,” says Kelleher. “This allows them to provide feedback, often in real time, which benefits both the seller and the buyer.”

Willingness to travel continues to vary notably from group to group. Some PEGs report internal moratoriums on any commercial travel, or policies stating that in-person meetings may be attended only if accessible by car, whereas others are actively traveling. Many say the travel decision varies from professional to professional and is a personal, consequence-free decision.

“Some groups have told us that they are willing to get on a plane if it helps them prevail as a buyer,” says Neuner.

For some private equity groups, the willingness to travel varies by sector. For example, closing a consumer services or business services deal without meeting management may be more feasible than closing an industrials deal, for which the facility, operations, and manufacturing footprint are more critical to see in person.

“We don’t see travel getting in the way of getting deals done,” says Baltimore. “We’re seeing transactions moving forward without face-to-face meetings, especially as groups become more adept at using virtual tools to build rapport with management teams or to tour facilities using video or virtual reality. People seem to be accepting the fact that this may be our reality for a while.”

Conclusion

In sum, while buyer sentiment and portfolio performance are showing positive signs of recovery, the M&A market still has ground to cover before it fully returns to its pre-COVID-19 level of activity. And while the credit markets remain a challenge for some deals, the private equity community is learning to live with virtual dealmaking.

“Based on what we’re hearing from private equity groups, they believe that the second half of 2020 should continue to present more M&A opportunities,” says Neuner. “We’re optimistic that 2021 will look even better, and that lender confidence will become much less of a barrier to a full M&A recovery.”

Published August 2020