# Private Equity – Resilience Leads to Opportunity
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-09-29
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: Private Equity Market Outlook 2021
Meta Description: Explore the current state of the UK private equity market and the impact of COVID-19 on businesses and investment opportunities. Get expert analysis from
URL: https://financedigest.com/private-equity-resilience-leads-to-opportunityhtml

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_By **Philip Dakin** (Managing Director) Restructuring advisory, Kroll._

As the UK exits the summer months and certainly at the time of writing, the vaccine roll-out looks to have had the impact needed to push COVID-19 off the news agenda and get the economy moving once more, the private equity market remains strong.

The core fundamentals that power the market remain. Not only is there a huge pent-up demand but also debt markets remain positive in terms of both leverage and the [cost of financing](https://www.financedigest.com/finance-teams-have-been-left-in-the-dark-on-the-real-cost-of-working-from-home.html "Finance teams have been left in the dark on the real cost of working from home").

According to Preqin’s _2021 Global [Private Equity](https://www.financedigest.com/procurementin-european-private-equity-investment-adding-value-to-the-boardroom.html "Procurement in European private equity investment – adding value to the boardroom.") and Venture Capital Report_, the global private equity market is now worth over $4 trillion1 . The UK, long the most developed [private equity sector](https://www.financedigest.com/dollar-slides-on-contraction-in-private-sector-activity.html "Dollar slides on contraction in private sector activity") in Europe, remains at the centre of this trend. However, as we come out of lockdown there are two sides to this picture—the dry powder available to private businesses, and the [impact the pandemic has had on private equity](https://www.financedigest.com/4-trends-that-will-have-a-major-impact-on-private-equity-in-2021.html "4 Trends that will have a major impact on private equity in 2021") vehicles.

**When Supply Meets Demand**

COVID-19 has been without a doubt one of the [biggest challenges ever](https://www.financedigest.com/the-biggest-ever-shake-up-of-insurance-law-is-finally-here-wellalmost.html "The biggest ever shake up of insurance law is finally here! Well…Almost.") to confront the economy. No more so than for the private sector. However, for businesses, both large and small, government support has been available in the form of loan schemes, the job retention scheme (aka furlough) and moratoriums on rent and HMRC liabilities.

While [cash flow](https://www.financedigest.com/how-smes-can-improve-cash-flow.html "How SMEs can improve cash flow") may look strong today, the rollback of government support will start within months, and for some, pressure on balance sheets will follow soon after. This is not to say that the financial pressures facing businesses will drive many into insolvency but [dealing with an increase in working capital requirements is a challenge](https://www.financedigest.com/how-to-deal-with-challenging-employees.html "How to Deal With Challenging Employees?") facing many business owners in the short term.

Potential changes to [capital gains tax](https://www.kroll.com/404?item=pub%3a%7b5A21FEFA-544C-4F6B-8DE3-776EA486D0F6%7d%40en) are also beginning to focus the minds of many business owners who may now see this as a time to invest or indeed sell.

For many, public ownership has fallen out of favour as an exit strategy, and selling to a competitor, especially in the [current circumstances](https://www.financedigest.com/how-a-british-brand-catered-to-hnwis-can-maintain-its-position-within-the-global-luxury-sphere-and-even-grow-in-these-current-circumstances.html "How a British brand catered to HNWIs can maintain its position within the global luxury sphere, and even grow, in these current circumstances"), can have its own business risks. The [private equity](https://www.financedigest.com/can-private-equity-do-for-africas-manufacturers-what-its-done-for-f1-and-rugby.html "Can private equity do for Africa’s manufacturers what it’s done for F1 and rugby?") market has been the beneficiary of a trend that has been happening for over a decade following the last great economic shock of 2008.

With the supply of [investment opportunities](https://www.financedigest.com/investment-opportunities-for-businesses.html "Investment opportunities for businesses") looking healthy, what does the demand curve look like?

As mentioned previously, there [remains a high level of market liquidity and a strong desire from funders to invest in quality businesses](https://www.financedigest.com/iran-open-for-business-but-caution-remains-the-watchword.html "Iran: ‘open for business’ – but caution remains the watchword"), with private equity funds—a continued firm favourite route—to market for institutions, family offices and high-net-worth individuals. In other words, there is lots of [opportunity for investment](https://www.financedigest.com/private-equity-firms-hungry-for-investment-opportunities-but-business-owners-must-be-cautious-2.html "Private equity firms hungry for investment opportunities, but business owners must be cautious") and acquisition. This has already been demonstrated, with [global M&A activity](https://www.financedigest.com/asias-factory-activity-weakens-on-global-slowdown-cost-pressures.html "Asia’s factory activity weakens on global slowdown, cost pressures") in Q1 2021 being at its highest for over a decade.

However, whilst there is plenty of dry powder, the stage at which a private [equity fund](https://www.financedigest.com/uk-investors-add-1-2-billion-to-equity-funds-in-march-calastone.html "UK investors add .2 billion to equity funds in March – Calastone") was in the normal fund lifecycle when the pandemic hit, will have a potential impact on the success of that fund and its ability to raise its next fund. How the portfolio of [investments within a fund have been managed through the pandemic](https://www.financedigest.com/3-investing-lessons-you-can-learn-from-still-evolving-pandemic.html "3 Investing lessons you can learn from still-evolving pandemic") and how they recover post-pandemic will be crucial.

**Portfolio Resilience**

PE firms themselves have [faced their own unique issues as a result of the pandemic](https://www.financedigest.com/how-to-maintain-customer-loyalty-and-trust-in-the-face-of-a-pandemic-and-digital-competition.html "How to maintain customer loyalty and trust in the face of a pandemic and digital competition"). [Funds briefly stopped active transactions back in March 2020 as economies closed](https://www.financedigest.com/galois-capital-flagship-fund-to-close-after-ftx-losses.html "Galois Capital flagship fund to close after FTX losses") and people were ordered to stay home. All attention was instead focused towards an almost A&E “triage” assessment of their portfolio companies at the start of the pandemic, with origination and portfolio teams working together to [support the management](https://www.financedigest.com/how-to-manage-burnout-and-how-leaders-should-support-employee-wellbeing-tom-keya.html "How to manage burnout and how leaders should support employee wellbeing | Tom Keya") teams of their portfolios.

Many sponsor-backed companies [struggled to access government-supported loan schemes](https://www.financedigest.com/europe-struggles-for-clarity-on-russias-roubles-for-gas-scheme.html "Europe struggles for clarity on Russia’s roubles-for-gas scheme"), such as CLBILS and CBILS, ironically due to EU laws on state aid for “undertakings in distress.”

The typical private [equity investment structure using quasi-equity debt instruments to fund](https://www.financedigest.com/norway-wealth-fund-to-consider-investing-in-unlisted-equities.html "Norway wealth fund to consider investing in unlisted equities") investments being the root cause. However, most have taken advantage of the job retention scheme by furloughing employees and sought access to grants and the deferral of accrued HMRC liabilities to [weather the storm](https://www.financedigest.com/how-digital-commerce-merchants-can-weather-the-economic-storm.html "How Digital Commerce Merchants Can Weather the Economic Storm"). Needless to say, in some instances, this has resulted

in a squeeze on working capital, and any top-up [funding has had to come from existing lenders and/or equity](https://www.financedigest.com/rate-rise-fears-prompt-third-week-of-global-equity-funds-outflows.html "Rate rise fears prompt third week of global equity funds outflows") injections from the PE houses themselves. The question now is how much of that dry powder has been utilised in supporting their portfolios to maintain a [status quo](https://www.financedigest.com/the-status-quo-is-not-an-option.html "The status quo is not an option") for 12 months, and what impact does that have on their ability to make new investments.

But despite the uncertainty, many PE [firms are adapting and keen to point to their funders’ patience and understanding in what has been a difficult period for the business](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business") world. Equally, there will undoubtedly be [opportunities to acquire some assets cheaply as some corporates](https://www.financedigest.com/navigating-the-post-brexit-debt-landscape-opportunities-for-corporate-funding.html "Navigating the post-Brexit debt landscape: opportunities for corporate funding") fail in the post-pandemic market. These may provide bolt-on opportunities for existing portfolio investments or [create](https://www.financedigest.com/creating-sustainable-value-through-responsible-investment.html "Creating sustainable value through responsible investment") a new platform investment.

We are without a doubt entering uncharted territory, and unlike previous recessions, the pandemic may have long-term [effects on consumer](https://www.financedigest.com/consumer-durables-sector-still-feeling-the-effects-of-recession.html "Consumer durables sector still feeling the effects of recession") behaviour and business models.

Like all other markets, private equity needs to negotiate the current COVID-19-induced [economic crisis](https://www.financedigest.com/new-pm-rishi-sunak-pledges-to-lead-britain-out-of-economic-crisis.html "New PM Rishi Sunak pledges to lead Britain out of economic crisis"). But the sector is immensely well placed to weather the storm because one of the key characteristics of PE is its ability to be nimble and respond [quickly to changing](https://www.financedigest.com/seeking-right-tone-new-uk-pm-truss-had-to-quickly-change-gear-for-queen.html "Seeking right tone, new UK PM Truss had to quickly change gear for queen") trends.


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