Private Equity Outlook: 2021 Acquisition Surge Driven by Distressed Assets

Record levels of dry powder will very likely result in heightened acquisition activity in 2021, particularly with regards to distressed assets and businesses negatively impacted by the economic slump in 2020. Fund experts at Intertrust Group believe valuations for many businesses in a number of sectors have fallen in the wake of the pandemic, to levels that represent a highly attractive opportunity for private capital.

Ritesh Rathi, Head of Funds Solutions, EMEA, at Intertrust Group, says: “Looking at the private capital space, distressed assets represent significant market opportunities for well-positioned investors. There was an expectation that this would happen early in 2020, driven by weak valuations, but that has not been the case. As such, the stage is set for a very strong market in 2021. Intertrust Group is expecting a huge spike in transaction volumes.”

“There is a lot of dry powder around – a record amount – so the opportunities in the context of distressed assets are huge. Valuations will be key, and we expect valuations in many cases to continue to fall to more attractive levels in 2021.”

Edwin Chan, Director, Business Development, EMEA, for Intertrust Group’s funds division, adds: “A material volume of retail and hospitality and related sector assets are under significant stress and need restructuring. This will clearly be a key focus in 2021. In addition, a lot of these firms are owned by private equity (PE) companies as well as leveraged by private credit (PC) managers, and they will either be managing or restructuring assets, or selling on to other PE firms.”

“As part of this process, one noteworthy trend we are seeing is a number of managers – and we expect this figure to grow – that are selling assets to themselves, for example Fund II selling distressed assets to Fund III. Investors in Fund III are aware of this and it is often in their best interest to extend the investment period before a true exit. We saw a lot of this in Q4 2020 and this will become more common in 2021.”

A shift towards outsourcing

One of the findings from Intertrust Group’s Global Private Equity Outlook 2020, published in June this year, was that almost all respondents to the survey – 92% – said there will be an increase in distressed fund transactions over the next 12 months. Likewise, 40% said they see the fundraising climate for distressed opportunities “significantly” improving; a further 43% saw it slightly improving (83% in total).

Mr Rathi comments: “As funds look to realise distressed opportunities, we see a very strong argument for outsourcing. Risks and uncertainties are still material factors – the pandemic has not gone away and the impact is still being played out – so firms will, we believe, look to outsourced partners rather than invest in additional staff or expensive technologies.”

Jonathan White, Commercial Director – Funds at Intertrust Group, concludes: “Operational efficiencies and the delivery of customisable data have accelerated up the agenda across 2020, and we see a strong trend for managers to partner with outsourcing specialists that can meet these requirements. This allows them to focus on asset management and realising market opportunities.”