Surveying the State of Private Equity

By Brandon Mavleos, Sr Director of Product Marketing

If necessity is the mother of invention, then we can assume private equity (PE) dealmakers have come up with some inventive strategies over the past year. As businesses scrambled to respond to the COVID-19 pandemic in the first half of 2020, many PE firms found themselves putting conventional exit plans on hold. With traditional sales and IPOs basically off the table in many sectors, it was time to get creative. And PE dealmakers did just that.

On one end of the spectrum, PE dealmakers began exploring less frequently used options to capitalize on the red-hot equities market: debt financing, private investment in public equity deals (PIPEs), and special purpose acquisition companies (SPACs), to name a few. On the other, many PE firms looked inward, examining their own operations for opportunities to streamline dealmaking and exit processes.

What approaches have PE firms pursued in these unprecedented times? How are PE dealmakers rethinking deal preparation, marketing, and due diligence? What role will technology play in helping increase returns and investor confidence in the future? We surveyed more than 500 global PE professionals to find out. You can find the details in our latest Private Equity Market Brief on Exits with market data provided by PitchBook. Here are some of the highlights. 

A Snapshot of PE Sentiment

In the first half of the report, Datasite joined forces with Pitchbook to examine macro-level trends. Among the findings:

1. Exit prospects didn’t diminish everywhere

COVID-19 did not affect all sectors equally, and several, such as healthcare and IT, continued to present strong exit opportunities. Looking ahead, many PE professionals hope to offload previous investments in sub-sectors such as home fitness, media, and consumer goods that have benefited from the pandemic and that look promising relative to the broader economy.

2. PE firms explored SPACs and additional liquidity pathways

Direct listings and private secondary exchanges for employee liquidity are not historically associated with the PE realm. But PE-backed companies have found iterations of these strategies to suit their needs. SPACs, for example, dominated headlines in the final stretch of 2020, raising the most capital ever by far.

3. Overall, PE remained surprisingly resilient

While PE dealmaking reflected heightened investor caution, liquidity stayed relatively flat. Overall, exit volume was beginning to decline in 2019 after a five-year stretch of record PE liquidity. Figures for 2020 continued this year-over-year decline but actually remained quite healthy relative to pre-2015 numbers. In fact, the strong exit sizes suggest recovery is already occurring, presenting a relatively bright picture for PE sellers. All in all, the exit environment remains marked by relative confidence as we begin 2021.

Firms Look to Go Digital

The second half of the report focuses on responses from PE professionals to the Datasite survey. One thing that immediately stood out: just how complex the dealmaking process has become. In particular, M&A exit preparation, deal marketing, and due diligence consume a huge amount of time and effort. Of the 563 corporates Datasite surveyed, more than two thirds (67%) named due diligence as the most time-consuming stage of the M&A process, taking one to three months, on average. 

Fortunately, PE leaders also believe these processes could benefit substantially from digitalization. Survey respondents anticipate that new technology will yield substantial improvements across three key areas:

1. Exit preparation

PE leaders believe sound exit preparation—focused on readiness, transparency, and ongoing value creation—can have a huge impact on returns. Many begin working with portfolio company executives as early as 18 months before a prospective exit to start populating a secure data room with exit documents. And 44% of respondents believe this is a key area that will benefit from digitalization.

2. Deal marketing

Overall, respondents saw significant room for improvement in current deal marketing and communications processes. Nearly half, for example, cited lack of insight into buyer behavior across deal marketing projects to be a major barrier. Fortunately, this is another key area where digitalization can help, automating many manual processes and providing much more visibility into buyer engagement.

3. Sell-side due diligence

Respondents believe that due diligence represents a huge opportunity for digital tools to automate and accelerate current processes. A majority of PE leaders expect new digital technologies to cut due diligence timelines in the future to one month or less .

The journey to full digitalization will take time, but this is all good news for the future. After all, the goal for PE firms is not just realizing returns but keeping investors motivated to continue investing. From that perspective, investments they make to streamline exit preparation and due diligence can yield significant returns, removing friction for buyers and enhancing the firm’s brand equity.

Learn More

Want to know more about the state of private equity, what we can expect in 2021, and our top recommendations to digitize PE dealmaking? Download the report now.