The COVID-19 pandemic is causing devastating losses, and multiple sectors of the economy are taking a nosedive. However, private equity investors may find opportunities amid the carnage. In recent years, rising markets made it challenging for private equity firms to invest. Therefore, most of them have been stockpiling cash, waiting for a market dislocation. With the looming financial crisis, the high company valuations that kept them at bay, are collapsing. Investors are waiting to scoop struggling businesses at low prices. Here are opportunities for private equity investors during this crisis:
Despite market downturns, many private equity firms are still pursuing mergers and acquisitions. There are numerous investment opportunities in industries that are less affected by the pandemic, and investors are rushing to get a share. Traditional acquisitions are still lucrative in sectors like technology, renewable energy, financial services, and infrastructure. PE are also likely to benefit from strategic acquisitions or buy and build investments.
2. Purchase of distressed assets
Liquidity and bad debt problems are emerging due to a sluggish global economy. While it is devastating to see companies declaring bankruptcy, it is an attractive investment for private equity investors. They can acquire distressed companies at discounted prices and restructure them. Companies with high potential can be sold at a premium price later.
Apart from buying companies that seek bankruptcy protection, private equities can also focus on SMEs with a promising value proposition. Middle-sized businesses with a loyal customer base have high growth potential, making them attractive to private equity investors. As the COVID-19 crisis persists, private equities will be eyeing companies in the retail and hospitality industry. While the pandemic has stalled these businesses, they are expected to make a quick recovery after the crisis. Investors can restructure these companies, provide capital for expansion, and sell them at their highest value.
Which sectors have the highest investment potential?
Private equity investors should aggressively invest in the following sectors that are showing a lot of growth potential:
There is a growing interest in technology in a myriad of industries during the lockdown. Technology is instrumental in business continuity during the pandemic, and its increasing demand makes it a lucrative opportunity. Investors are rushing to acquire technology companies, to meet the need for innovations and technology products.
During this global health crisis, the Biotech industry is flourishing. Both governments and private companies are pumping money into the sector to increases the chances of finding a vaccine. Financing biotech ideas to scale from prototype to products is a lucrative investment opportunity for private equities.
E-commerce is an obvious winner, with most people preferring to shop online. There is a massive expansion of e-commerce platforms like Amazon. Besides, legacy players are improving their online services. Businesses in e-commerce are expanding to meet the growing demand from online consumers.
The fierce competition in the bull market left many private equities with lots of cash. Therefore, they are well-positioned to take advantage of the current downturn. However, investors should tread carefully to avoid substantial losses if the market takes too long to recover.