BrazilA&M's Amit Laud and Bob Rajan on current private equity trends
Europe’s private equity industry is experiencing one of its busiest periods ever, with an extraordinary amount of money being raised and number of deals taking place. A discussion with Amit Laud and Bob Rajan, Managing Directors at Alvarez & Marsal, on some of the main trends they currently see in the market.
How is the sentiment at private equity firms?
The pressure is on like never before. Industries and companies that have weathered through Covid-19 will now command even a higher multiple upon exit because they have proven their resilience, which is attractive to private equity firms and investment management firms.
Sectors like software and fintech have done very well in this space specifically and are currently considered the ‘darlings’ of private equity.
What specific trends are you seeing in the sector?
Digital: Digital enablement has become a massive theme as the pandemic has pushed companies to prioritise digital transformations for optimal value creation. What were historically deemed as typical value creation levers in any transformation, are now being analysed with a digital lens to enhance and accelerate value creation.
Speed: Deal lifecycle is being increasingly compressed, with an emphasis on driving value creation earlier than later in the deal process and reaching a high multiple in a quicker time frame. The market is hot, and firms are willing to pay a significant premium for companies.
In today’s world, it is not only about revenue maximisation, but also margin expansion to safeguard value. Traditional cost cutting, while still important, needs to be coupled with sustainable commercial growth in order to generate value.
Carve-outs: Carve-outs are becoming more popular by the minute within the private equity space, with significantly more taking place than in the previous two to three years. Specifically, ‘buy and build’ carve-outs have become popular. We see two main reasons for this development.
From a corporate perspective, companies are carving out non-core businesses because they require first and foremost require cash. In addition, these non-core business do not fit with their overall go-forward strategy.
From a private equity perspective, portfolio companies are drawn to carve-outs because of their significant value potential that can be attained not only from a stand-alone basis, but also merging the acquired target with an existing portfolio company and extracting synergies to drive value creation.
Record fundraising: We are seeing some of the largest fundraising in history from various funds, regardless of Covid-19, and the number of funds that are at record fund levels is unprecedented. In the next few months, there will be pressure to put this money to work.
What upcoming trends do you expect over the next 6 months?
Overall, post-deal transformation work hasn’t kicked off as much as expected as there is significant amount of unallocated funds in the market, and large cost-optimisation projects we thought would happen have come to fruition have not yet been a focal point.
Specifically looking ahead, Covid-19 has highlighted the necessity of moving towards digital and growing their business commercially.
What steps should private equity firms be taking now with those trends in mind?
Cash and liquidity forecasting is important and ensuring that it is robust to accurately plan for all potential outcomes. In anticipation of another wave of Covid-19, proper business continuity planning within a company’s supply chain is key. Every crisis teaches us the need and importance for a ‘Plan B’ and the pandemic has proven yet again how important contingency planning is.
According to a recent ranking, Alvarez & Marsal is one of the leading M&A consulting firms to the private equity industry. The firm supports its clients pre-deal (deal strategy, due diligence, etc) and post-deal (value creation, performance improvement, portfolio optimisation, etc) services.
