Like other industries, private equity adapted in 2020 in order to survive. But unlike many, adaptation is the private equity industry’s core competency. “PE People” tend to kick into overdrive when they feel there is an opportunity or a threat. COVID-laden 2020 presented both. This ability to adapt has served the industry well for decades and is in part reflected in their investment returns, historically exceeding returns in the public stock market.
I observed in a previous post last August that investors like predictability, and that negative shocks to the economy (like a recession) are not all bad because they tend to reveal the truly exceptional businesses as investment opportunities.
Using Evolution has a micro example of the broader private equity market, the balance of 2020 played out as I expected it would. There was more activity than many would have anticipated considering the general economic turmoil and restrictions on travel. I had pointed to the fact that banks appeared to be functioning normally and had quickly facilitated financial relief through the SBA’s PPP program. In addition, private funds had over $1 trillion of committed capital waiting for investments.
During this period, Evolution was able to acquire two platform companies and make four additional add-on acquisitions. Each of these companies was exposed as an exceptional opportunity because of their resilience. None of these companies came to market because they were “troubled” as a result of the pandemic, but rather owners’ retirement plans were accelerated by post-COVID challenges staring them in the face.
I have been surprised that many of the opportunities we see are not getting any “COVID adjustment” to normalize earnings. Though they have been negatively impacted by the pandemic, they were not permanently damaged. A large percentage of acquisition targets are being valued as they always were, based on trailing twelve months earnings with adjustments. If anything, some of the COVID impact is being offset by lower travel and entertainment expenses.
Remote working is working. Not traveling saves a lot of time for everyone, and also saves a tremendous amount of money typically allocated to meals, hotels, plane tickets and uber rides. We believe, as others do, that this will be a permanent change to the private equity industry, among others. We at Evolution realized very quickly that we were minimally impacted in the short term by remote work and only moderately so over the long term. The use of video conferencing exceeds use for regular phone calls now, and has also brought a personal touch to these interactions, a level of humanization, that was not typical prior. Hopefully we will all absorb and embrace this new normal, using it to develop more meaningful working relationships.
While everyone was glad to see 2020 end, we all adapted during the year, either temporarily or permanently in our own way, and we will all be stronger for it.