After a decade of stellar growth, private equity (PE) like other industries has slammed into the brick wall called COVID-19, resulting in a pause on some transactions and the deep-sixing of others. Lending is slowing, and the financial landscape is more complicated than ever. But the good news for PE is that it’s sitting on a record $2.5 trillion in cash (or “dry powder”) to be deployed on future deals, at a time when high valuations have collapsed across the board.
The targets for these potential PE transactions run the gamut, from energy firms and healthcare properties to home security companies. Other targets ripe for the picking include hotels, restaurants, movie theaters and casinos. “These are fundamentally good businesses that are going to have a terrible year,” the head of mergers at one big firm on Wall Street told CNBC. “There’s an opportunity for private equity to go in there and take a meaningful stake or buy the company at a valuation they could not have gotten before.”
PE firms could take minority stakes in public companies, provide bridge financing for new deals or snap up companies outright. Much of the opportunity will come in industries hit hardest by the pandemic. According to ThinkWhy, these roughed-up sectors are led by Trade, Transportation and Utilities, followed by Leisure and Hospitality and Manufacturing.
In Retail Trade, for example, belt-tightening consumers are expected not only to favor companies selling necessities or essential goods, but to accelerate the online buying trend. So look for larger, financially sound food, drug and mass-market retailers, often backed by private equity, to capitalize on those trends by acquiring smaller regional players.
Restaurants present another opportunity. Valuations in this battered industry have been so decimated, some private equity firms are eyeing the chance to pick up chains or franchisees for rock-bottom prices. In March, Bloomberg reported that Apollo Global Management – a huge PE firm with restaurant companies in its portfolio – was considering investments in more than 250 unidentified distressed assets, including those in the energy and travel and leisure sectors.
The hospitality arena is primed for private equity investment, according to Tony Ryan, managing director of global mergers and acquisitions in JLL’s Hotels and Hospitality Group. Instead of buying an individual asset with third-party management, Ryan says, PE firms are apt to acquire existing hotel operating platforms, allowing them to scale up the business by adding new assets and developing the management business themselves. “That way,” he says, “they can both enhance the performance of the assets and create a management company as another vehicle of value to sell down the track.”
Location, Location, Location
Of course, the location of these potential acquisitions will be critical as well, since recovery from the pandemic will be uneven across U.S. metros.
LaborIQ® by ThinkWhy forecasts that MSAs where Leisure and Hospitality jobs dominate, like Las Vegas and in Southern and Central Florida, will be at highest risk during the recovery. So too will fiscally troubled, densely populated cities such as Chicago.
On the other hand, metros with a well-educated, well-paid, white-collar workforce are apt to do well. Examples include Washington, D.C., where government provides a reliable workforce; Boston; the San Francisco Bay Area and Seattle. In technology-focused Seattle, for instance, tech has come through the pandemic relatively unscathed, and cloud computing continues to be in high demand.
There’s also a good recovery case to be made for smaller MSAs with lower population densities such as Salt Lake City; Madison, Wisconsin; and Durham, North Carolina.
While it’s far from clear exactly what the post-pandemic business environment will look like, once the dust settles, PE firms will have an unprecedented opportunity to make quality deals in the best locations at favorable prices. Performance analytics showing current metro and industry status and future forecasts, as provided by LaborIQ by ThinkWhy, can help PE firms know where and how to steer their dollars. Those who prepare now to pounce as soon as the time is right will fare best.
ThinkWhy continuously monitors and forecasts industries and MSAs to measure the impact on the labor market. Stay current with us. We are here to support organizations and provide insights during the economic downturn as well as the recovery phase.