The pandemic has highlighted both the strengths and the weaknesses of the Private Equity industry in the U.S. After riding a decade-long wave of growth in deal volume, valuations, and funds raised, the beginning of the second quarter in 2020 saw a precipitous fall across all these metrics. This resulted in investors pulling back from the market to reorient their business not only with respect to their existing portfolio assets, but also adjusting to the new environment which restricted travel & in-person meetings to conduct diligence, and pushed a vast majority of professionals to work from home.
Since the onset of the pandemic, private equity GPs have faced a plethora of challenges, from the debate around eligibility for PPP loans to portfolio write-downs or additional liquidity needs, the inability to meet with LPs from a fundraising standpoint, conducting diligence over zoom calls, and of course the absence of camaraderie that results from having everyone in the same office. Despite these challenges, there have been a few bright spots for GPs that have skillfully adapted quickly to the new environment as well as those that are investing in some highly sought after industries (healthcare & technology to name a few) and strategies (distressed & turnaround transactions). The way asset managers are operating has also evolved in a broader sense, with more teams embracing remote working as a long-term solution and generally increasing focus around technological capabilities and infrastructure.
The market slowly started to turn a corner in the third quarter of the year with investors coming back to the table to push deals across the finish line that had been on the backburner, looking to put capital to work, getting back to the fundraising trail, and testing the market for exits. Though not out of woods by any stretch, investors seemed like they were ready to get back to it. Our goal in conducting this research was to find out how ready they were and will be. By surveying a group of middle market private equity investors in U.S., we aimed to establish where confidence among this class of asset managers has trended and will trend. How far back have we bounced from the disruption witnessed early in the year? What are investors seeing with respect to quality of deals, portfolio liquidity needs, valuation levels? We explore these areas and much more in our inaugural quarterly report on tracking Investor Confidence for the U.S. Middle Market Private Equity industry.