Markets continued to soldier on with barely the whisper of a downturn.
Paying up for growth
- One of the defining characteristics of the post-2008 global financial crisis period has been the steady march of high valuations. In a world that remains awash in liquidity, firms can continue to expect to pay substantial premiums for platform acquisitions. Indeed, according to S&P Leveraged Commentary and Data, LBO purchase multiples hit an all-time high in 2019, at 11.5 times EBITDA. Perhaps more significantly, 2020 saw little respite despite the uncertainty posed by the pandemic. While the number of deals was markedly lower, deals that did go through traded an average of 11.0x EBITDA.
- We expect the trend to continue in 2021, and that PE firms will take a number of steps to mitigate expensive investments. They’ll continue to look toward buy-and-build strategies in order to average down multiples when the thesis allows it. Most importantly, they’ll maintain their rotation into growth-oriented businesses, and look to supercharge that growth with the deep benches of operational expertise they’ve built over the last decade.
The year of ESG
- It’s clear that the direction of travel for global commerce has been toward greater awareness of the environmental and social implications of economic activity, and PE has been no exception. The last several years have seen firms begin to report on their ESG initiatives in earnest.
- However, questions have remained. A focus on ESG is easy when times are good, but do companies still care when times get tough? Or do they revert to a singular focus on the bottom line?
- 2020 showed us that strong bottom-line accountability can indeed coexist with attention to a business’ broader responsibilities around its human, consumer and social impacts. PE firms ushered their portfolio companies through one of the worst crises in modern times. Concurrently, many of them made significant advancements with their ESG agendas, developing new protocols and elevating the role of the Sustainability Officer. 2021 will undoubtedly see firms continue these advancements. For some, it will mean embedding the foundational elements of ESG into the investment management and portfolio oversight process in order to manage risks and capitalize on opportunities. For others, it will involve comprehensive frameworks that cover the entire PE enterprise, wherein a broad range of externalities is identified, tracked, measured and reported to a firm’s key stakeholders.
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With more than US$750b in dry powder currently available to buyout funds, greater economic certainty, and strong tailwinds from the leveraged finance markets, firms will be actively looking to deploy capital in compelling opportunities. Amid increased competition, more than ever, they’ll need a compelling investment thesis and the ability to pull multiple value creation levers.