Market trends

Private equity’s boom: Why it’s happening & what’s next

AlphaSense

|

August 25, 2021


Private equity (PE) is booming. From healthcare to technology to grocery stores in the UK (yes, you read that right), we’re seeing the dry powder from 2020 invested by the billions as economies worldwide begin to recover, and markets around the world look to get back on their feet.

The increase in private equity activity is an evolving view of its role in the market and new potential areas for PE growth, including sustainable investing, increasingly a requirement rather than an added benefit for investments of every type.

Let’s take a deeper dive into private equity — where it’s been, the boom it’s experiencing right now, and what the future of PE might look like in a post-pandemic world.

Unused Capital Boosts PE Activity

The onset of the COVID-19 pandemic in early 2020 left private equity investors at a loss about the future. As a result, minimal investments were made as investors remained conservative, waiting for more certainty before making additional moves with their capital.

Now that the market has bounced back and the world looks to be on the road (albeit a bumpy one) to pandemic recovery, a surplus of unused capital coupled with historically low borrowing rates has created a private equity boom with record amounts of raised capital.

Healthcare PE Expands

Not surprisingly, given the nature of the worldwide crisis over the past 18 months, private equity investment in the healthcare sector has exploded.

While overall PE deal volume decreased by 14% last year amidst the onset of the pandemic, the healthcare sector surpassed its 2019 record deal levels by 21%, completing 380 deals globally, according to Bain & Co’s Healthcare Private Equity and M&A report.

The pandemic has forced innovation across the healthcare sector, from telehealth to COVID-19 testing and diagnostics to mobile apps or wearable tech that help people monitor symptoms and general health. This naturally draws the attention of venture capitalists and PE firms, and private equity can be spotted this year across specialized areas, including primary care, urology, orthopedics, gynecology, and of course, COVID-spawned trends such as vaccine-related technologies.

UK Draws Investor Attention

The UK has seen an unprecedented burst of attention from PE investors across industries, with recently acquired targets in:

  • Aerospace (Meggit and Signature Aviation)
  • Sports (Liverpool Football Club)
  • Grocery retail (Morrison’s — currently under a full-out bidding war)

The rise in private equity interest in UK targets, mainly from American PE investors, can be attributed to a combination of Brexit fears and bargain valuations during the UK’s accelerated economic recovery post-pandemic, according to Lancaster University Senior Economics Lecturer Robert Read in his recent article for UK’s The Conversation.

While the economic benefits of a thriving PE investment scene are appreciated, Read also points out valid tax, debt, and oversight concerns more prevalent for PE-funded companies than their publicly-traded counterparts, where records are public and thus accountability more inherent. 

On the immediate horizon are inflation concerns, specifically, fear over how raised interest rates will affect a debt-heavy business economy.

Private equity and sustainable investing

Not to go unmentioned is private equity’s increased alignment with sustainable investing trends as investors, targets, and the general public alike hold increasing concern for how investments make societal and environmental impacts. For example, private equity funds investing exclusively in renewable energy assets raised a record $52 billion. As a result, AUM in the climate finance sector, which tripled over the last decade, is expected to double by 2025.

Barriers to entry into the ESG investing scene for private equity investors, including data and reporting, are both resolving as industry standards evolve and firms invest in the technology and data required to report effectively on ESG activity. 

Increased sustainable investing activity from PE firms is likely to have a continued positive growth impact as every kind of investor from HNWIs to large financial institutions looks for sustainable standards in both portfolios and practice.

What’s next for private equity?

There are two ways to look at the future of private equity. First, as it relates to predicting PE trends based on history, and second, the immediate future as the economy rebounds from unprecedented market conditions throughout the COVID-19 pandemic.

Private equity, like any market, is cyclical, and the boom we’re seeing right now is likely to slow down as the market stabilizes and exits its recovery phase to enter the post-pandemic future. As a result, borrowing rates will rise, and the debt strategy behind so many PE acquisitions won’t remain as attractive. Indeed, other trends will emerge that draw new attention.

But the pandemic has also altered the view of private equity from the perspective of the investor and the general public in ways that will likely stick around.

Private equity’s longer commitment terms, long viewed as one of the biggest risks and potential downsides of PE investment, have proven beneficial during a year of unprecedented volatility and unpredictability. Going forward, it would not be surprising to see investors and institutions look to diversify in that direction.

Perhaps most notably, the view that private equity is not the universal bad-guy — the cutthroat corporate raider set out to tear down corporations for a hefty profit — has quieted. Instead, it’s clear today that private equity has been the main driver for technology innovation by many companies who now play a pivotal role in our societies at large.

To learn more about technology and investment opportunities, check out our exclusive four-part webcast series with HSBC, where experts and analysts discuss emerging technologies and trends aiming to make an impact across multiple global sectors. Access each session here.

Share this article

More like this