Page 10 - DIY Investor Magazine - Issue 26

CAN PRIVATE EQUITY THRIVE IN THE ‘NEW NORMAL’?
• Private equity has thrived since the Global Financial Crisis
• After declines in March, private equity valuations have recovered
• Private equity companies have proved resilient
By Alan Gauld, Investment Manager Standard Life Private Equity Trust plc
This has been a golden decade for private equity. The financial conditions following 2008’s Global Financial Crisis were ideal for the asset class to flourish, with interest rates low and plenty of capital looking for higher growth assets. The question today is whether private equity can continue to thrive in the ‘new normal’ that emerges from the Covid-19 crisis?
Over the past decade, private equity has seen a virtuous circle. Returns have been strong, encouraging new capital into the sector, which has allowed good companies to stay private for longer. While companies might have previously listed at an enterprise value of around $500m (e.g. Amazon), today, they have been able to raise the money to grow while remaining in private equity hands (e.g. Airbnb).
However, today, investors are questioning whether returns can be sustained at the levels we’ve seen for the last 10 years. Investors have assumed that this crisis will see private equity valuations weaken, as they did during the financial crisis. There have been media reports of some problems at private equity- owned companies, particularly in ‘at risk’ sectors such as leisure and travel.
Certainly, we saw a large decrease in valuations in March. Private equity companies will use public market valuations as a benchmark, so it was inevitable that the weakness in the major stock markets around the globe had an impact in the private equity sector. However, as valuation figures have come through over the summer, we have seen a significant uptick that almost fully offsets the drop in March.
RESILIENCE IN CHALLENGING CONDITIONS
Undoubtedly, there are still companies in there that are struggling, but the number of companies that have proved extremely resilient in challenging conditions is perhaps the greater surprise.
Part of this resilience was that private equity managers had recognised in advance that the market environment was likely to change. They knew this was the longest bull market they had seen and, in many cases, had prepared their portfolios.
‘DIGITALISATION AND THE SHIFT TO ONLINE IS A BIG PART OF THE INVESTMENT THESIS’
They were increasingly investing in resilient sectors such
as technology, healthcare and consumer staples. For the Standard Life Private Equity Trust, these sectors now represent around half of its net asset value (NAV).
Where private equity managers are invested in more cyclical sectors such as industrials, or consumer discretionary, they are focused on specialist areas.
Typically, digitalisation and the shift to online is a big part of the investment thesis. The Trust is an investor in Photobox, for example. While this is ostensibly a consumer discretionary company and should be vulnerable to weaker economic conditions, it has proved resilient in this crisis.
People took the opportunity of lockdown to organise the photos on their phone, creating new albums and the company has posted record numbers.
Similarly, Dr Martens, the footwear brand, initially appeared
to be vulnerable because of the closure of its physical stores during lockdown, but its online channel has almost completely offset lost physical sales.
Allegro, the Polish online marketplace, has also traded at record levels during 2020 and recently successfully listed on the Warsaw Stock Exchange during the second half of year.
DIY Investor Magazine | Dec 2020 10