Woeful Economy yet $2.4 Trillion of Capital to be Deployed
As we plunge into this long overdue and pent up recession, a fact remains that is worth mentioning. Per Fortune, there exists $2.4 trillion of unspent private equity capital in the market, the highest total ever recorded. For those who don’t know, private equity funds have a contractual mandate to deploy committed capital, generally in 5-7 years from the start of the fund, or they will lose out on their investor commitments.
Despite the recent brutal economic climate, and with so much continued uncertainty, we are still receiving calls from investors asking for deals and reiterating that they’re open for business. For example, we recently spoke with a software-focused private equity contact of ours, talking about paying lofty revenue multiples, even when the S&P went down nearly 10% in that day, and ~25% in the last few weeks. Other inquiries include specialty debt/finance providers who are alternative lenders to that of traditional banks, and offer cash flow-based to growth technology companies who are naturally asset light.
While without a doubt, groups will exercise more caution and less exuberance, the fact remains they need to deploy this capital, or they lose out on such commitments. Specifically those who’s portfolio of companies have been less affected, will have less of a reason to slow down on evaluating new investments or acquisitions. So, if a business is performing well (>$10mm revenue, >20% growth, >15% profitability, strong recurring rev, low churn, low customer concentration, in recession resistant industries), many options still exist, and we expect company values to generally hold up, on the expectation that the broader economy will rebound upon a flattening/declining of the curve for Coronavirus, as this is a public health crises damaging the economy, not an economic one, like the last recession. Further we expect more demand for “safer bets” with companies in industries less affected (healthcare, insurance, IT), or perhaps even benefiting for this climate (think Zoom, Peleton, Slack), which may drive values back to where they were a month ago or higher.
For those industries related to travel, events, oil/gas, etc.., they’re likely already too heavily impacted, whether their financials reflect it or not, and may be placed in the “value” or “distressed acquisition” camp, with a valuation to match, or just lack of interest. Whereas for other industries, it remains to be seen how much of an impact there will be, which depend on customer retention, mission critical nature of their product/service, and some continued growth, etc.. Perhaps stating the obvious, yet to receive a growth-type valuation (revenue multiple or high single digit – low teens EBITDA), companies are still expected to perform well, even through a situation like this one.
Timing the market is nearly impossible and how long the current state will persist, yet with this record amount of capital in the market that needs to be deployed, there’s inherent urgency for funds to transact with the many strong performers out there weathering this storm, and who can still generate solid returns funds are seeking. This in turn may not hamper activity and values as much as one would expect, yet its important to know who are the value investors vs. the growth oriented folks.
HRC is happy to speak with you regarding your business, provide feedback on valuation, the desired transaction you are seeking, options in the marketplace, and how we can be instrumental in accomplishing your strategic objectives.