Q2-2020 Private Equity Update

Q2-2020 Private Equity Update

While the second quarter saw a slight uptick in private equity invested capital, deal volume dropped by more than 50% from Q1 due to the COVID-19 pandemic’s effects on the US economy. PE groups and their potential investment targets shifted their focus away from M&A in order to address diminished volumes, workforce issues, and cash flow management. A positive note however, has been a willingness by most funds to push transaction timelines back rather than abandoning deals altogether. Private equity firms continue to sit on a significant level of dry powder earmarked for investment and, with the expectation economic activity will ramp up in the second half of the year, investors have sought to restructure transactions to mitigate risk and obtain necessary financing approvals. Provident’s deal flow has mirrored this trend, with two closed transactions during the second quarter despite COVID-19 related business disruption.

Common themes among these restructured transactions have been larger equity checks, greater earn outs, and deferred payments in order to keep overall valuations attractive to sellers. Provident expects to see buyers incorporate more creative financing plans and unique deal structures throughout the second half of 2020 to overcome today’s tighter debt markets. These factors, along with growing visibility around business reopening and consumer sentiment, will lead to an increase in deal volumes and invested capital in subsequent quarters.

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