The PE sector has shown great resilience since the Pandemic. The outlook of the sector suggests a growing demand for PE investments that are driven by Technology, ESG, and SPACs according to John Hudson of HULT Private Capital.
The Private Equity investments were offering staggering annual returns of 20.1% and 14.2% for the five-year and ten-year periods respectively leading up to 2019. The next year 2020 witnessed a pandemic that affected every business sector globally.
Even though private equity investments were down in the first two quarters of the year 2020, the trends soon reversed. The PE sector showed great resilience and made a strong comeback amid coronavirus crises globally.
The PE sector plays an important role in fulfilling the capital financing needs of private businesses. As businesses feel overwhelmed by the global crises, their needs for private equity have grown manifolds.
The experts at HULT Private Capital have been examining the key trends in the PE sector. They have compiled an informative article to inform potential investors about the recent trends and prospects of the PE sector in the immediate future.
Private Equity Investments
Since the pandemic, the SMEs in the UK have received a staggering £80 billion in government-backed loans or VAT deferrals. It is highly unlikely to sustain the capital needs of SMEs with debt financing alone.
Private equity and venture capital provide alternative finance sources to unquoted companies. As the UK is preparing to ease the COVID restrictions, businesses will need sustainable capital to fund growth.
The mainstream lending institutes including leading banks in the UK have imposed higher restrictions on debt financing. Access to equity financing through shares issue is only relevant with public companies. Hence, the SMEs and the private sector at large rely heavily on private equity funding.
As for the investors, private equity funds also offer great investment returns. The PE sector in the UK outperformed some of the top share indices with higher annual returns. The annual returns of five-year and ten-year PE investments were recorded at 20.1% and 14.2% respectively leading up to the year 2019.
Amid challenging times due to the Covid-19 pandemic, the PE sector is evenly poised to help businesses and investors alike. The private equity sector can play a pivotal role in rebuilding the UK economy by bridging the crucial gap between the needs and the availability of capital financing for private businesses.
How the Pandemic Affected the PE Sector?
The Covid-19 crisis affected every business sector globally. Private Equity remained no exception to that phenomenon during the pandemic crises as well. The global trends for PE funding fell by 24% for the year 2020.
The first two quarters of the year 2020 saw a nose dive decline in the private equity and venture capital funding. The decline was largely driven by the closure of existing businesses due to lockdowns and travel restrictions imposed by governments around the world.
The UK was one of the severely hit countries in the world due to coronavirus spread. Businesses were forced to close down and startups went to a halt. Inevitably, the need for private equity dried up for a short span.
Government-backed loans and VAT deferrals also helped businesses to survive through the times. Debt financing also played a crucial part in supporting existing and new businesses.
The trends with private equity funding soon started to reverse. The last two quarters of the year 2020 witnessed a steep upwards trend in the PE funding demand.
HULT Private Capital and the Resilience of the PE Investment Sector
Despite a fall in the private equity funding in the first two quarters of 2020, the sector made a strong comeback in the second half. The average deal size increased by 24% to an average of $ 776 million.
The average returns on the private equity investments were 2.19x for the period of 2015-19. The realised global returns on the private equity investments surpassed the five-year average and offered a return of 2.3x in the year 2020.
The private equity and venture capital funds showed impressive performance in the UK too. Both sources combined arranges a significant investment amount of £12 billion for startups in the last year alone.
From the investor’s perspective, the private equity investments also showed higher returns on investment. In the last five years, private equity investments offered an annual return of 20.1%. The average for the ten-year remained 14.2%, both of these figures are significantly higher than comparative investments such as leading shares indices.
Despite challenging times and a steep fall in PE investments, the sector showed a great comeback during the pandemic time. The investments were affected by different growth demands in the different sectors as well. For instance, as fintech is the leading sector in the UK, it faced stern challenges during the pandemic as most startups were delayed.
Another key challenge for the PE industry has been its transition to digitalisation. As businesses adapt to the new normal of remote working, the PE industry needs to pick up the pace as well. The sector has already shown impressive signs of improvements as the numbers suggest for the last year.
The PE investment sector can continue to play an important role in the economic recovery for the UK and economies around the world. SMEs in particular have limited access to debt financing and capital markets. We can expect the private equity sector to fill the void as it has been for the past few years now.
What are the New Trends in Private Equity Investments?
Despite severe disruptions caused by the pandemic, the PE investments made a good comeback in the second half of 2020. Most of the demand for PE investments was driven by the special purpose capital acquisition companies (SPACs).
The remote working and digitalisation of businesses meant an increased demand for the tech sector. The technology sector continued to dominate the private equity investments for the last year or so as well.
Although the global private equity investments witnessed a total decline of 20%, the average deal size increased by around 24%. The average deal size for the year 2020 remained at $ 776 million globally.
We saw a surge in the demand for technology-driven products and services globally. Businesses shifted to the e-commerce model and online shopping accelerated at an unprecedented pace. Further, the travel restrictions meant businesses had to adopt the remote-working trends.
These factors quickly helped the tech sector regain momentum during the pandemic. As a result, the private equity sector received an accelerated demand from the technology sector.
As for the UK, the fintech segment already dominated the startups. Six out of ten fintech startups in Europe come from the UK alone. Thus, we can expect a dominant demand for private equity investments in the fintech and the tech sector broadly in the coming years.
Another key trend for private equity investments has been the larger emphasis on the ESG principles. The environmental, social, and governance principles have become key factors for PE investment funds in recent years. Around 63% of the PE funds now evaluate the ESG principles before investing.
At the same time, these emerging trends can pose new challenges for PE firms as well. New working trends and technology disruptions would lead to new compliance requirements as well. Thus, we can expect challenging and rewarding times for PE firms in the near future.
The Prospects of PE Investments in 2021 and Beyond
The PE sector has invested £43 billion through private equity and venture capital funds in the UK for 3,230 businesses in the last five years. The trend is likely to continue as the evidence already suggests.
Private equity investments offer an attractive proposition for investors and fund receivers alike. The sector can play a crucial role in revitalising the lost economic activities globally.
In the aftermath of the Covid-19 crisis and the Brexit, the UK investors look bullish. Most of the investors now want to invest in UK companies instead of global firms. That offers a unique opportunity for the PE investments firms as well as a challenge to rise to the occasion.
HULT and the Future of PE
Private equity offers crucial financial support to startups and SMEs. The PE investments have been playing a pivotal role in supporting the UK economy through private equity funding.
The PE investments have shown accelerated returns on investment despite challenging times in the last two years. Despite facing a decline, the PE sector has emerged stronger during the pandemic crises. The upwards trends for the PE investments are likely to continue in the year 2021/22 and beyond.
The investment experts at HULT Private Capital work with you to find the best investment that matches your needs and present funds that ring fence capital while achieving admirable returns. HULT stand true to their core values with investments that are simple and easy to understandable.
Find out more by contacting HULT Private Capital Here.
References for Research Work:
Industry Performance (bvca.co.uk)
Infographic: The Resilience of Private Equity in 2020 | Bain & Company
Top 4 Private Equity Trends for 2021 – CT Corp | Wolters Kluwer
Private equity can help UK SMEs weather the Covid-19 crisis – and build a more sustainable economy | Business Leader News
Private equity is key to recovery and growth of UK businesses | IFA Magazine