Alive and Kicking

| Private Equity | Perspektiven

  • Private equity markets have been hit hard by the COVID-19 crisis, with North America experiencing the worst of the falls in investment and exit activity.
  • We are already seeing a number of investment opportunities emerge, from the current crisis, particularly among small and mid-market companies and secondaries.
  • In H1 2020, Unigestion contributed EUR 425 million to investments and received distributions from investments of EUR 209 million.


The impact of the COVID-19 pandemic on private equity investment and exit activity in the second quarter has been severe. However, the fall in activity has not been uniform across the market. North America posted particularly large declines in both investment and exit activity, while Europe and the APAC region were less impacted. In addition, small and mid-market investment activity has shown more resilience than at the larger end of the market. Meanwhile, investors have in general not been put off by the crisis with fundraising activity remaining buoyant. Indeed, total fundraising in the first half of 2020 fell by only 4% compared to the same period in 2019.

Small Deal Activity Holds Up

The global aggregate value of private equity deals closed during Q2 2020 was EUR 103bn, 48% down on the same quarter last year1. Likely driven by the more protracted pandemic in the US, North America saw the largest decline with a 55% decrease. Europe showed a 40% drop while APAC fared better with only a 26% drop.

Investment activity in small and mid-market companies (defined as deals less than EUR 500m in enterprise value) showed more resilience than large cap deals (deals greater than EUR 500m). The aggregate value of small and mid-market deals completed declined by 26% in the quarter, compared to 63% for large cap deals. This means that, for the first quarter in more than five years, more capital has flowed to deals at the small end than the large end of the market.

Figure 1: Investment Activity by Deal Size (EUR bn)

Figure 1: Investment Activity by Deal Size (EUR bn)
Source: Preqin, July 2020.

This was likely driven by a significant drop in availability of debt for larger deals, as well as the volatility of the public markets limiting the number of public to privates and large corporate carve-outs.

On the other hand, small and mid-market deals have fewer obstacles. Firstly, the use of debt is more limited and can be sourced from specialist debt funds or other institutional providers, rather than banks who have concerns over their existing loan books. Secondly, small and mid-market companies are known to show more resilience during recessions2. Indeed, such companies tend to operate in niche sectors or in those that are less sensitive to economic ups and downs. Furthermore, they are usually more nimble. In times of trouble it is easier for them to react quickly – for example to immediately cut costs or reduce capex.

This is demonstrated by the latest investment for Unigestion Direct II. In June 2020, Unigestion closed its investment in Aquam Water Services (AWS), the UK’s leading provider of outsourced tech-enabled standpipe management services to water utilities. AWS is exposed to stable end markets such as street cleaning services. Indeed, volumes of hired standpipes managed by the company continued to grow even through the worst of the UK’s COVID-19 lockdown.

Global exit activity continued a downward trajectory that began before the COVID-19 pandemic. The global aggregate value of exits in Q2 2020 was EUR 76bn, 56% down on the same quarter last year. Again, North America posted the largest decline (-60%), with Europe (-52%) and APAC (-34%) showing lower but still material declines.

Despite the economic crisis caused by COVID-19 and the consequent slowdown in private equity deal activity, investors have not reduced their demand for private equity exposure.

As we saw in Q1, despite the economic crisis caused by COVID-19 and the consequent slowdown in private equity deal activity, investors in general have not reduced their demand for private equity exposure. So far in 2020, EUR 220bn has been raised which is only 4% down on the same period last year3. However, given that the number of funds closed is more than 30% down, it seems that investors are preferring to invest in larger funds.

Average pricing for private equity deals reached record levels of over 11x EBITDA towards the end of 2019. Many investors are hoping to see prices fall on the back of the current slowdown. While it is too early to see any trend in the data, it is clear that competition for deals will not easily go away as private equity managers continue to collect fresh capital.

However, we believe that the ratio of dry powder to investment activity at the small end of the market is much more favourable than at the large end of the market. Figure 2 below shows how dry powder for funds with size of EUR 1.5bn or greater has risen by 67% in the last 5 years. For funds below EUR 1.5bn, dry powder has remained flat. This suggests that the upward pressure on pricing at the large end will be much greater than at the small end of the market, especially given that larger deals have recently become scarcer.

Figure 2: Dry Powder by Fund Size (EUR bn)

Figure 2: Dry Powder by Fund Size (EUR bn)
Source: Preqin, July 2020.

Secondary Opportunities Are Appearing

In April 2020, we wrote a paper outlining why we thought that the economic crisis caused by the COVID-19 pandemic will likely present some excellent secondary opportunities, particularly at the smaller end of the market. However, we expected that most potential sellers would wait until at least the publication of Q2 valuations before tapping into the secondary market. Nonetheless, we are already seeing a whole range of highly interesting opportunities.

According to intermediaries, this is a phenomenon only being seen at the lower end of the market. Currently, we are seeing a range of secondary types, from singe LP stakes to sidecar funds, and from different types of sellers, from banks to family offices.

In Italy, we are in the final stages of purchasing a large stake from a family office in a 2012 vintage fund consisting mainly of two food-related companies. Although the companies have been performing particularly well, we were able to negotiate a material discount.

In Denmark, we have just completed a transaction with a GP whereby we are the sole investor in a sidecar fund set up to provide growth capital to the two most promising companies in their portfolio. The largest investment in the portfolio is in a wearable tech company for women which will grow at over 100% this year. Nevertheless, we were able to negotiate a sizeable discount to the valuation set prior to the COVID-19 pandemic, combining a secondary purchase with a convertible instrument.

In the US, we are working on a single asset restructuring of the last remaining portfolio company of a 2000 vintage fund. Even though this company has performed extremely well in recent months, we have the opportunity to come in at a 50% discount to the latest valuation.

The similarities across these opportunities are that (i) they are all small secondary transactions, (ii) they are deals consisting of one or two “COVID winners” – companies which have performed well during the lockdown, and (iii) we are able to negotiate sizeable discounts. While larger sellers are waiting longer before beginning formal sale processes, small sellers tend to be more opportunistic and prefer selling through quick discrete bilateral processes.

We will continue to search for the best secondary opportunities that are currently emerging from the crisis.

Unigestion Private Equity Investment Activity

The first half of this year was very busy for the private equity team at Unigestion, despite the slowdown in the market caused by the pandemic. Between January and June 2020, Unigestion contributed EUR 425 million to new investments and received distributions of EUR 209 million.

In H1 2020, we contributed EUR 425 million to new investments.

Figure 3: Investment Activity in H1 2020

Figure 3: Investment Activity in H1 2020
Source: Unigestion, July 2020.

Some highlights of the new commitments and investments we made are as follows:

In April, we committed to Polaris V, a small to mid-market buyout fund with a focus on the Nordics. Founded in 1998, Polaris is one of the longest established firms in Denmark. The firm typically makes majority buyout investments in succession situations or carve-outs of niche businesses from large corporates. The firm has an agnostic approach towards sectors but has invested mainly in businesses operating in the services, industrials and consumer sectors. Over the years, Polaris has developed a robust and structured value creation approach, combining hands-on operational impact, buy-and-build execution and organisational development.

In the same month, we also committed to Rubicon Technology Partners Fund III, a small to mid-market buyout fund in the US. Founded in 2012, Rubicon Technology Partners is an operationally focused buyout firm investing in North American enterprise software companies. Targeted companies enjoy recurring software revenues, are profitable or near profitability and are typically founder-led businesses. Rubicon seeks to partner with management teams who are strongly aligned with go-forward plans particularly in areas of investment, operational improvements and long-term strategy.

In June, we committed to Bencis Buyout Fund VI, a small to mid-market buyout fund with a focus on the Benelux region. Established in 1999, Bencis concentrates on business and consumer services, industry and manufacturing, and food and beverage, aiming to identify stable companies in overlooked market niches but with strong market positions and the potential for organic growth. Bencis favours fragmented sectors in which it can consolidate through the acquisition of smaller players. The lower entry prices for these add-ons also typically leads to multiple expansion at exit, when Bencis can sell a larger company with a strong market share.

Also in June, Unigestion Direct II, together with our investment partner Cadence Equity Partners, invested in Aquam Water Services (AWS) and Orbis. AWS is based in Manchester and is the UK’s number one provider of outsourced standpipe management services to water utilities. The company enables end water users (e.g. local authorities who need water from street level access points for road cleaning, etc.) to rent standpipes and legally extract water from utility networks.

In addition to AWS, the transaction included Orbis, which has been the “outsourced R&D arm” of AWS. Based in San Diego, Orbis manufactures GPS-backed intelligent modules that can provide customers with valuable data on water usage, location, leakage detection, etc. These modules can be attached to AWS’ standpipes, creating intelligent standpipes that are rented at higher price points. There is also scope for Orbis’ intelligent modules to be applied to various other adjacent items, including hydrants and pipes, thereby substantially expanding the customer base and addressable market of the combined group.

We also invested in Evondos alongside Verdane Capital. Founded in 2009, Evondos is a Finnish company that develops and assembles automated medical dispensing solutions and rents them to its customers over contracts of 1 to 4-years. Its main product is a dispensing robot targeted at elderly patients with reduced cognitive abilities, which automatically dispenses the right medicine at the right time in the right quantity and enables caretakers to easily and accurately track a patient’s medication intake.

The products are used mainly by elderly home care patients and sold to municipalities or home care agencies. Evondos is a market leader and its USP compared to existing and emerging competitors is higher reliability and the ability to read all multi-dose sachets in the Nordics market, as well as a broader set of features which makes the service more suitable for various patients.

1Pitchbook, July 2020.

2See “Small and Mid-Market Private Equity: The Calm During the Storm” published by Unigestion in May 2020.

3Preqin, April 2020.

4See “Private Equity Secondaries: the Opportunity of the Decade?” published by Unigestion in April 2020.

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Document issued September 2020.