Distressed funds set to flourish in post COVID world

An overwhelming majority (92%) of private equity fund managers expect to see a rise in the volume of distressed fund transaction activity over the next 12 months. Due to the impact of COVID-19, almost half (46%) of respondents believe that mismatches in valuation expectations between buyers and sellers will restrict deal flow.

Intertrust, a global leader in providing tech-enabled fund and corporate solutions, interviewed around 150 private equity fund managers across Europe, North America and Asia to identify the risks and opportunities facing the industry in light of the COVID-19 pandemic.

Distressed strategies are also likely to benefit from an improved fundraising climate, which for most other fund types is expected to worsen.  83% of respondents expect the fundraising climate for distressed funds to improve over the next 12 months, of which 42% say it will significantly improve.  Venture funds are expected to see the biggest drop in investor appetite with 74% predicting fundraising conditions will worsen.

As the private equity sector adjusts to a rapidly transformed landscape, the study revealed a growing interest in the role that private debt can play during and after the crisis. Almost a third (31%) of private equity investors are planning to diversify into direct lending strategies over the next year.

Despite the volume of dry powder in the market, the research highlighted the underlying sentiment of caution gripping the private equity industry. Nearly three quarters (73%) of investors expect private equity firms to be driven by the need to stabilise the financial health of portfolio companies, while over half (54%) believe GPs will be ‘in defence mode’ until the impact of the virus is fully understood.

In terms of measures being adopted by GPs as a direct consequence of COVID-19, the most common is fund term extensions. 75%expect to see term extensions for funds nearing the end of their term to be introduced to allow more time for deployment.

Despite the challenges ahead facing a profoundly altered market, the study reveals that there remains some positivity in the industry. A third (32%) of respondents believe the environment for private equity will improve and around half (47%) say they are optimistic the industry will be able to face the pandemic and, ultimately, come out stronger over the next two years.

Chitra Baskar, Global Head of Funds said: “Distressed funds specialising in debt, turnarounds and special situations are likely to be the biggest near-term beneficiaries as falling valuations present highly attractive buying opportunities for GPs with large amounts of capital to deploy. Yet the study suggests that mismatches in price expectations between buyers and sellers could slow down deal flow, at least until the market fully adjusts to the new environment.

“The COVID-19 pandemic will test the private equity industry like never before and GPs are understandably focused on protecting the health of their portfolio companies as a priority.  While fund term extensions point to a sustained slowdown in deal flow, for those brave enough to enter the market the next 12 months could offer tremendous opportunities.”

To download the full Global Private Equity Outlook 2020 report, please click here.

¹Research was carried out in April 2020 by Citigate Dewe Rogerson, on behalf of Intertrust. A total of 143 responses were gathered from private equity fund managers across Europe, North America and Asia via an only survey sent to a global database of private equity professionals provided by Intertrust and Preqin.