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  • 6 Private equity predictions for 2020

6 Private equity predictions for 2020

11 March 2020

Nick Lazanakis, Head of Corporate Finance |

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The private equity industry stands at the beginning of a new decade with more dry powder on hand than ever—$1.5 trillion—thanks to record fundraising in 2019.

However, with ongoing rumblings of an economic downturn and continued aggressive competition for quality deals, deploying that capital is getting more, not less, challenging. Ever the mother of invention, necessity is giving birth to creative new investment strategies. 

Here are six trends that will help define the first year of a new decade in private equity deal making.


Prediction #1: Secondaries will Continue to Eat into Primary Deal Share

The secondary market transformed from private equity’s sedate stepsister to one of the more explosive areas of growth among alternative investments. 

In 2002, the secondary market was about $2 billion, according to Preqin. Fast forward to 2020 and Lexington Partners’ announcement in January that it raised the largest ever secondary fund, $14 billion, and the year is off to a promising start. 

That $14 billion raised by Lexington represents 71% of the total that secondary funds raised in 2019. According to data provider Preqin, global secondary firms that closed new funds in 2019 raised $19.6 billion, nearly half of what they raised in 2018. 

At the same time, secondary deal aggregate value is expected to top $90 billion in 2019, up from $72 billion in 2018.

Private capital has grown in popularity as investors seek higher returns than the public markets can offer, and alternative investments have emerged as a vehicle that offers a way around high management fees and illiquid assets. The secondary market, co-investments and direct investments have been particularly frothy. 

Expect to see more GPs leading secondary buyouts, with more marquee names making the headlines, and a continued rise in co-investments. In fact, as a result of the popularity of alternatives, 43% of private equity funds plan to offer co‑investments to their limited partners, according to BDO’s 2020 U.S. Private Capital Outlook report

Also, expect even further specialization this year as competition continues apace and assets move at or above net asset value. We expect to see more direct secondaries among investors who want liquidity sooner than assets’ exits allow.



Prediction #2: Digital Transformation Will Be a Drive of Value Creation

While competition for deals continues to be intense and deal multiples hover in the double digits, private equity funds are trending toward focusing on enhancing the value of their existing portfolio. 

According to BDO’s Private Capital Outlook report, there is a stark decline in the number of PE fund managers who said they would direct the most capital to new deals (50% in 2020, compared to 90% in 2019) and a corresponding increase in those who said they would direct the most capital to funding portfolio working capital needs (28% in 2020 versus 1% in 2019). 

To facilitate their value creation initiatives, PE firms are turning to digitalization and digital transformation, and when evaluating prospective deals, 68% say digital potential in a target is “very” important (the remaining 32% say it’s “moderately” important). 


“Private equity is looking for an angle with respect to technology to become more efficient and drive top-line growth in their portfolio companies, and they see digitalization and digital transformation as a way to help them achieve that. Digitally transforming is a vehicle for better profits, more streamlined operations, better security and smarter, more strategic growth, so it’s no surprise that private equity is prioritizing it.”  


PE_Predictions-for-2020_Duran.jpg     LEE DURAN
    Assurance Partner and Co-Leader of BDO's Private Equity Practice



Prediction #3: Distressed Deals WIll (Finally) Get Some Momentum

Underscoring the expectation that a recession, however elusive it has been thus far, is on the horizon, private equity fund managers say they expect investments in distressed businesses to be a top deal driver in the next 12 months, again according to BDO’s U.S. Private Capital Outlook.  

These predictions come after a pullback on distressed debt fundraising and countless headlines to the effect of “Don’t invest in distressed debt right now.” 

According to Private Debt Investor, distressed debt comprised 19.3% of global capital raised in 2015, 23.7% in 2016 and 31.5% in 2017. But that number nearly halved in 2018, to 17.4%. As of July 2019, only $8.5 billion had been raised for distressed debt. 

But this aligns with PE execs’ predictions: just 1% said distressed deals would drive deal volume in 2019; for 2020, that number is 40%, according to the U.S. Private Capital Outlook. 


“There will be opportunities for those who are prepared to step into a distressed situation that others are trying to move out of. A combination of having a lot of leverage but lower demand for certain services allows lenders or distressed investors to come in at more realistic valuations, take over ownership and wait for the economy to come back for the business to perform better and see great returns.”  


PE_Predictions-for-2020_Krupar.jpg     JOHN KRUPAR
    Managing Director, Restructuring & Turnaround Services, BDO



Prediction #4: Business Developers Will Be Kissing More Frogs

As a byproduct of the intensity and volume of competition in the market, we are seeing more of our private equity clients create roles for business development representatives. 

This is corroborated by a Navatar poll, which found four of five PE firms either already have or are considering hiring a business development professional. Tasked with identifying and drumming up prospective deals, they are out in the market “kissing more frogs” to increase the likelihood of opportunities turning into proverbial princes

As part of their role, business development representatives are also tasked with parsing troves of data in order to aid that identification process. Data analysis can reveal the extent of a prospective target’s  engagement with a fund’s messaging and marketing—a strong tell—as well as allow business developers to ascertain, through tracking deal flow quality and quantity, which bankers lead the best deals and which may need help with their investment criteria, according to Navatar.



Prediction #5: Fund Managers Will Become Specialists

As competition for deals continues to sizzle and deal multiples remain in the low double digits, PE execs will continue to scrutinize opportunities closely. Part of this process means becoming industry specialists.  

Half of private equity respondents to our survey said they were being more selective when evaluating highly valued deals in preparation for a possible market downturn, 41% said they were raising additional capital and 30% said they were exiting current investments


“There is more and more industry specialization each year. Private equity firms are going deep in industries to get smarter, so that if they’re overpaying, they’re educated on how they’ll be able to get returns and have a well-considered thesis.”  


PE_Predictions-for-2020_Hendon.jpg     SCOTT HENDON
    BDO's National Leader of Private Equity and Co-leader of Global Private Equity



Prediction #6: More SPACs (Special Purpose Acquisition Companies)

While it may not be booming, there is certainly more interest in the market for special purpose acquisition companies (SPACs). 

If the number of SPACs that have popped up just in the Chicago area, where our headquarters are located, within the last few months is any indication, expect to see more SPAC activity in the market in 2020. 

The main caveat, of course, is that SPAC activity is a corollary of the general IPO market. SPACs are “blank-check companies” that go public in order to merge with or acquire another company using the proceeds they raised as part of their own IPO. The acquisition they plan to make must take place within 24 months of the SPAC’s IPO, or the SPAC must return investors’ money with interest.

While what happened with IPOs in 2019—the disappointing results of Uber and Lyft’s post-IPO performance, the WeWork debacle—is likely more a blip than a rule, it nevertheless now factors into investors’ considerations when they think about exiting.   

“Whenever there’s stock market volatility like there was in late 2018 and the summer of 2019, there will be fewer IPOs. As there is more clarity in the IPO market, you’ll see more SPACs.” -SCOTT HENDON, BDO’s National Leader of Private Equity and Co-leader of Global Private Equity


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