Last year saw private equity firms go crazy on portfolio growth, internal investment, and joint venture market reinforcement. As expected, this approach emphasized the growing importance of sustainability and corporate social responsibility. This year, stakeholders are signaling an awakening investment season, spearheaded by PE firms and fund managers.
Considering the recent happenings including better vaccine rollouts as well as reduced lockdowns, it’s no wonder the world is realizing a steady return to normalcy, especially the investors’ faction. Economies continue to move on with no single whisper of a downturn, contrary to what many predicted last year. At the same time, a huge cloud of uncertainty hangs across the markets on the impact of perhaps the final wave of the pandemic in 2021. With that in mind, below are our thoughts on this year’s PE market outlook, even as we remain open to the fact that we’re operating on uncharted waters as far as the Covid-19 menace is concerned.
Tech continues to be king, alongside new entrants
The economic recovery has been interestingly led by tech-backed investments. Just like last year, the tech train is seemingly rolling with no sign of stoppage any time soon. According to EY, the sector accounted for about 40% of the total PE deals value by the second quarter of 2020. For years now, the tech space has benefited from the biggest chunk of PE investments – estimated at around a quarter to a third of all the PE placements – and things are looking pretty much the same this year, save for some new participants threatening to trim down funding for tech, soon.
The push for decarbonization is augmenting deals in the energy space. This is in line with responsible investing measures fronted by global green investment policymakers such as the UN. Similarly, transport electrification is also fast settling in, despite the slower uptake in the past years. Investment in wind and solar energy is also expected to take a front seat in this year’s PE funding deals. Already, oil and energy companies are strategically positioning themselves in the industry to make the most of the incoming wave of sector investments. Recently, Total SE’s Board of Directors announced plans to make some material changes to transform the company into a fully-fledged energy firm. This, per the board, will see Total SE transition to Total Energies SE, if their planned proposal later in the year is anything to go by. The growth plan has seen the firm target green energy-leaning startups in a bid to spend the large pools of capital earmarked for green projects in 2021.
Meeting ESG Requirements
Today more than ever, companies are focusing on environmental, social, and governance criteria to meet market conditions and company expansions. Thanks to ESG, green investments such as green bond emergence/issuance are now gaining momentum.
In addition, every large corporation globally has made public its commitment towards zero-carbon footprint, something that is impacting investment appetite, capital allocation, as well as investment considerations. Firms are now focusing more on rebalancing their assets as more cash trickles into the green projects. With US$750B in dry powder up for grabs coupled with a stronger economic outlook, PE firms and fund managers will be anchored towards deploying cash to only the most lucrative areas. And considering the current cut-throat competition in the investment arena occasioned by thirsty markets, firms will need compelling investment theses and the ability to push forward with multiple promising projects, if they are to make 2021 the decade’s most attractive PE year.