Private Equity in 2020: Not as Bad as You Thought

Private equity firms had a year of extremes, going from frantically aiding portfolio companies to strong fundraising for tech investments, according to PitchBook.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

U.S. private equity firms raised “healthy” amounts of money from investors after the pandemic began last year, particularly for technology deals, even as most firms also poured cash into struggling portfolio companies, according to PitchBook’s 2020 review of the industry.

Private equity firms quickly figured out how to negotiate the extremes of 2020, cannily shifting from the frozen leveraged buyout business to buying minority stakes and putting money to work in public companies, according to the report, expected to be released Tuesday. After an initial downturn early in the year, exits also rebounded as private equity firms turned to special purpose acquisition companies (SPACs), traditional listings, and other sponsors to take holdings off their hands, reported PitchBook.

“What a rollercoaster 2020 was,” said Wylie Fernyhough, lead private equity analyst at PitchBook, in an interview with Institutional Investor. “Whether it was LPs having to pause allocations, or figuring out how to do due diligence online. Private equity really showed its resilience in 2020 with all these headwinds thrown at it.”

Emerging managers coming to market for the first time were hurt by the inability to meet investors face to face, but it wasn’t quite as dire as many people were claiming. According to PitchBook, fundraising for first-time managers was the lowest since 2013, but overall activity was in line with that of the last five years. PitchBook reported that 25 funds raised $5.7 billion in 2020, about 10 percent of all funds.

Family offices and other wealthy investors stepped up to invest in these fledgling funds, even if institutions were hesitant to put money with less well-known managers. “This suggests that LPs’ strong appetites for developing relationships with the top-performing managers of tomorrow has not waned,” wrote the report’s authors.

Private equity firms invested a lot more money into their hurting companies last year than they did in 2008 and 2009.

“Firms propped up their portfolio companies,” said Fernyhough. “That probably wins them some political capital as well. That is one of the more interesting topics that wasn’t talked about so much. But it shows how different this crisis and rebound was from the Global Financial Crisis.” Fernyhough attributed at least part of the influx of cash to private equity firms believing the economic downturn would be far shorter than it turned out to be.

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Last year also saw the mainstreaming of growth equity deals. Growth equity, which is a strategy somewhere between venture capital and leveraged buyouts, hit a record when it came to the value of deals. Deal value hit $62.5 billion in 2020, up 8.8 percent from 2019.

In addition, information technology deals increased by 72.4 percent to $20 billion, compared to $11.6 billion in 2019. PitchBook noted Blackstone’s hiring of General Atlantic’s Jon Korngold to head growth equity last year as a sign the strategy has become a mainstream part of private equity.

Rebecca Springer, a private equity analyst at Pitchbook, added during the interview that “this strategy has been growing in popularity over the last decade or so. But at the height of the pandemic, firms that were looking to deploy capital were looking to growth equity. That was largely driven by investments in technology. We saw software in particular become a safe haven during the pandemic.”

Although U.S. private equity fundraising dipped 36.6 percent in 2020, PitchBook said the total $203 billion garnered was “reasonable” amid the Covid-19 pandemic. And the pandemic may have been a “boon” for the largest tech-focused private equity firms, according to the report.

“While failing to reach 2019’s heights, 2020 U.S. technology fundraising did surpass every other year on record, totaling $63.1 billion across 45 funds,” PitchBook said.

Meanwhile, Springer expects the strategy to continue to grow this year. PitchBook noted positive signals such as Thomas Bravo’s agreement in December to buy RealPage, a property management software company, for about $10 billion, a value that will make it one of the largest tech deals in recent years. That same month, Vista Equity Partners agreed to buy Pluralsight for $3.5 billion.

“As public market multiples continue to diverge from private markets, opportunistic PE firms will target underperforming public companies they believe can be materially improved and returned to public markets at a loftier valuation,” according to PitchBook.