In this episode of the Drawdown, Cherry Bekaert’s Transactions Leader Jeff Bengtson provides a recap of trends in the private equity sector from 2020 – including how COVID has impacted investments – as well as an outlook on 2021 deal markets. He provides his perspective on what was driving private equity investment last year, as well as what’s in store for this year.
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The Drawdown, a podcast by Cherry Bekaert's Private Equity Practice.
HOST: MAGGIE: Today we are joined by Cherry Bekaert's transaction leader Jeff Bengtson to discuss the private equity trends he's seen over the past 12 months, including how COVID-19 specifically has impacted investments and what's ahead for the industry this year.
JEFF BENGTSON: Maggie, thanks for having me.
HOST: MAGGIE: On last year's podcast, you indicated 2020 was off to a great start and private equity firms had plenty of access to capital and debt to complete acquisitions. How did this change over the year?
JEFF BENGTSON: We had a great start to last year. We were hitting on all cylinders: buy side, sell side, consulting, IT, cyber, and we had our best month ever in March when the world changed with COVID-19.
After our March backlog was exhausted, many of our deals were put on hold in April and May, and the results we had reflected the realities of the nationwide shutdown.
Beginning in late May, we began to see a reversal of the April and early May downturns. We developed a product to help banks administer and monitor their Paycheck Protection Program, assisted business owners with their applications, and helped set up capabilities and programs so the banks could track the loans and ensure compliance.
During this time, our clients began to better understand the economics of COVID-19 and started doing deals again. By the end of the summer, we were back to our pre-COVID run rates.
HOST: MAGGIE: There's a common belief private equity was only focused on portfolio company management in 2020. Were deals actually getting done in private equity? Were they just add-ons or were platform deals completed in the second half of the year? What did you observe?
JEFF BENGTSON: I can only speak for our practice. We worked on over 300 transactions last year with a value over $9 billion. We did a lot of platforms and a lot of add-ons.
The biggest sectors for new platforms were technology, healthcare, professional services, and general business services.
HOST: MAGGIE: Are there any hot industries or segments that are highly attractive to private equity investors right now?
JEFF BENGTSON: With so many people working from home during the pandemic, the use of technology is at an all-time high. Technology has been less impacted and we expect an increasing volume of tech deals from our clients in 2021.
We have always done healthcare deals. In November 2019, we hired a healthcare-focused partner, Steve Stang, and our practice took off in 2020. We expect additional growth in 2021, particularly physician and dental practice roll-ups and surgery centers. Steve will be sharing his thoughts on the overall healthcare industry in an upcoming podcast.
HOST: MAGGIE: After the last financial crisis, private equity investors wanted to know how a business responded to and managed through a crisis. Are you seeing similar questions being asked during diligence about how the company was impacted by or responded to COVID-19?
JEFF BENGTSON: Yes. On almost all of our due diligence, both buy side and sell side, there's an effort analyzing and verifying COVID adjustments. The focus is on sales volume declines, associated margin decreases, and the impact of COVID on working capital.
Sellers often seek large add-backs for COVID-19. Buyers are concerned about the seller's ability to rebound to normalized levels from the COVID-induced downturn. That makes thorough due diligence on new acquisitions and portfolio add-ons even more important to identify issues and potential risks going forward.
HOST: MAGGIE: How has your workforce adapted to this new virtual world of online diligence and consulting, and has it worked?
JEFF BENGTSON: We have a new normal at Cherry Bekaert: working from home and not being in the office. If you work in a diligence group, you're not traveling to target locations to conduct due diligence. We're doing everything virtually.
There were early growing pains, but we figured it out quickly. Virtual data rooms have been used for a long time, and using Zoom, Microsoft Teams, and other platforms to interview management teams has taken time to perfect.
One area we've had trouble with is training and recruiting. A new manager starting in due diligence can't come into the office or be in the field learning how Cherry Bekaert does due diligence; they rely on video calls for training. We've invested significant time and effort into our training resources to address these challenges.
HOST: MAGGIE: What are some of the concerns private equity firms have today?
JEFF BENGTSON: Taxes are a big issue. The general consensus with the new administration is that corporate taxes may go up, though the timing is uncertain.
Access to quality deals is always a challenge and requires a focused approach by business development teams. Add-on activity will remain important for PE funds as they build platform businesses.
I'm also seeing more interest in Section 1202 stock, which allows capital gains exclusion on the sale of Qualified Small Business Stock if held for at least five years. It's complex, but some clients pursue Section 1202 opportunities on many of their deals.
HOST: MAGGIE: We've been hearing a lot about SPACs lately. Can you explain what they are and why they're important in the M&A world?
JEFF BENGTSON: A SPAC is a special purpose acquisition company. It's a non-operating, publicly listed company formed to identify and purchase a private company, allowing that target to become publicly listed.
SPACs became more prevalent in 2020. There were 247 newly formed SPACs that raised over $83 billion through initial public offerings. In 2019 and 2020, more SPACs were created than in the prior 18 years combined.
Private companies are willing to be acquired by SPACs because it's more flexible and less burdensome than going public via an IPO. Founders can also avoid IPO lockup periods for selling newly public shares. SPACs offer attractiveness on the sell side because they are already public and avoid the exhaustive IPO process.
HOST: MAGGIE: What are your thoughts on 2021 deal markets? Will they be the same, better, or worse than 2020?
JEFF BENGTSON: I think private equity fundraising will not slow down. Our clients will continue to raise new funds; some of our biggest clients are moving funds from fundraising into investing this year.
I recently read there's $1.5 trillion of dry powder to invest, which to me means competition and acquisition valuations will be high in the PE world.
Economic and political uncertainty under the new administration, especially around taxes, will be a big issue in 2021. The extent of vaccine distribution and our ability to get COVID-19 under control will drive much of the M&A environment.
Technology will continue to grow, and software companies with high recurring revenue and high margins will remain attractive. Healthcare will continue to be solid given our momentum from 2020. Watch out for virtual health in 2021: video visits, population management, and health monitoring will expand.
Overall, I expect 2021 to be slightly better than 2020, assuming we get COVID-19 under control.
HOST: MAGGIE: Jeff, we appreciate these insights. Thanks for your time.
JEFF BENGTSON: Thank you.
HOST: MAGGIE: Thank you for listening to The Drawdown, Cherry Bekaert's Private Equity Podcast. The views presented by our guests do not necessarily represent the views of their respective firms. For more information on how Cherry Bekaert serves as a guide forward to private equity funds and their portfolio companies through accounting, tax, and advisory services, please visit cbh.com.
