Fundraising, capital deployment, and exits recovered from the first-half 2020 market malaise caused by COVID-19.

The private markets saw a swift recovery in the second half of 2020, with the pace of fundraising, deployment, and exits all accelerating rapidly. On the fundraising side, the aggregate private equity capital raised in fiscal year 2020 exceeded 2019 by more than $9 billion, as the industry quickly adapted to raising capital remotely.1 Much of this fundraising was driven by larger, established firms in which investors had a sufficient level of comfort and familiarity with a manager. Moreover, the Fed’s easy monetary policy continued to steer investors seeking returns towards private markets and other higher risk asset classes. Real estate was a notable exception as office and hospitality assets were most at risk from COVID-19-related lockdowns. Consequently, real estate fundraising slowed significantly.
 

2020 private equity fundraising increased, but capital went to fewer funds.

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Technology, tech-enabled business services, and health care companies were beneficiaries

A similar story played out in deployment, with second-half 2020 seeing an impressive recovery that led to full year deal activity reaching nearly 85% of the prior year. Much of this activity was, unsurprisingly, driven by three key sectors that were net beneficiaries of the pandemic: technology, business services (many of which are tech-enabled), and health care. Together they accounted for nearly two-thirds of all U.S. private equity deal flow. Across all sectors, tech-enabled companies benefited from the rapid COVID-19-led digitalization of the economy. According to management consultant McKinsey & Co., e-commerce penetration alone saw 10 years’ worth of growth in just three months.2

It is also of little surprise that the venture capital market was a significant beneficiary of this digital acceleration. Not only did 2020 venture capital deal value close out the year nearly 40% higher than 2019, but U.S., late-stage venture capital valuations also rose significantly in 2020’s fourth quarter.1 The average, pre-money valuation of series D and later rounds more than doubled (from $381 million to $800 million) since the onset of the pandemic.1

SPACs emerge as an exit vehicle

Lastly, U.S. private equity exit activity recovered to near-2019 levels, with global exit activity ending 2020 almost $10 billion above the prior year.1 One interesting trend – beyond the already noted broader recovery – has been the emergence of the special purpose acquisition company (SPAC) as an exit strategy. These blank check companies help take businesses public without going through the initial public offering process; 2020 saw more SPAC listings than in 2006 – 2019 combined.1 In 2021 and beyond, this vehicle is expected to become an increasingly important exit path for private equity-backed companies. While SPACs may also represent competition for deals, to date private equity – and venture capital, in particular – has been a net beneficiary of this trend.

For a more detailed overview of alternative investments – including private equity, private credit, hedge funds, and real estate – see the fourth-quarter edition of the Alternative Investments Compendium.

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(1) Source: Pitchbook, as of December 31, 2020.
(2) Source: McKinsey; Five Fifty: The Quickening.


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Tatiana Esipovich

Tatiana Esipovich

Tatiana Esipovich is a Vice President on the Research & Due Diligence team. Prior to joining iCapital in 2017, Tatiana worked at DB Private Equity (part of Deutsche Asset Management) in New York. Tatiana started her career at Deutsche Bank in London. She received an MA in Modern Languages from Oxford University.