During a once-in-a-century pandemic, 2020 saw no end to business challenges. The new year began amid another surge in the coronavirus, extending the runway to recovery. Our predictions for 2021 account for deal activity that was unexpectedly disrupted and the uncertainty that will continue to force the industry to creatively adapt.
Renewed appetite for deals
Prediction
2020 saw the first decrease in PE deals since 2009. Activity picked up in 4Q20, and funds will build on that momentum in 2021 to put dry powder to work. Sectors that benefited during the pandemic are particularly desirable but will come at higher multiples.
Takeaway
With a limit on quality targets and cash to invest, deal values—and exit multiples—will continue to increase.
Due diligence after Covid-19
Prediction
COVID-19 will have a lasting impact on traditional ways of conducting due diligence. The pandemic has made clear that it’s possible to do business well remotely, and that includes due diligence.
Takeaway
Expect more virtual due diligence and remote management meetings. But, where possible, PE funds will opt for in-person interactions to gauge corporate culture and build a relationship with management.
Tightening regulations
Prediction
Growing regulatory scrutiny of fees and expenses may increase tensions between GPs and LPs. LP advisory committees (LPACs) have become more intertwined in fund operations, and fund managers could chafe at that.
Takeaway
The focus under the Biden administration will likely shift away from capital formation to investor protection.
Tax hike
Prediction
Looming uncertainty across capital gains & corporate taxes may spark choice of entity evaluations. With other short-term priorities at the forefront, tax changes may be deprioritized until later in 2021 or into 2022.
Takeaway
2021 may be the last opportunity for investors to take advantage of lower rates. Expect that to drive an increase in exits this year.
Creativity in deals structuring
Prediction
Innovative structuring such as earnouts, deferred consideration and breakaway clauses may be employed as market uncertainty and COVID-19 concerns continue, though concerns of both buyer and seller will gradually abate as a return to normalcy approaches.
Takeaway
Gaps between buyer and seller expectations will narrow given certainty in the post-election year and a more normalized deal-making landscape.