Last summer, The MBS Group undertook research to better understand how Covid-19 had impacted the private equity landscape in the consumer-facing sector. Our report – Responding to Covid-19: A new talent landscape, and a new role for private equity? – found that most consumer businesses had faced disruption at a never-before-seen scale and severity due to the pandemic. Despite that, our research indicated that:
• PE funds had an appetite to invest in the sector and predicted high levels of innovation in the future;
• Investment directors and chairs were pleased with the performance of their executive teams through the crisis; and
• CEOs felt that Covid-19 had deepened the relationship between themselves, their colleagues, and their funds.
Over the past few months, we have revisited this research. Speaking with partners and investment directors from generalist and consumer-specialist private equity firms, we have analysed the current state of the private equity sphere, tracking changes in appetite for investment and shifting leadership priorities since the outset of the pandemic. Here’s what we found.
The private equity market is exceedingly buoyant
Our previous report found that 96% of firms were either ‘very likely’ or ‘likely’ to invest in the consumer-facing sector in the next 12 months. This year, discussions with investment directors have shown that this positive outlook has been realised: firms have invested heavily in the consumer-facing sector and beyond, capitalising on trends emerging from the pandemic and those that had been building pre-Covid. Indeed, one firm told us that it had raised more and invested more this year than it ever had before. In the UK in particular, PE firms have been at their busiest since the financial crisis, targeting household names like Morrisons.
Investment priorities have remained steady
• In the summer of 2020, firms identified a number of sectors, geographies and investment types of particular interest. Specifically:
• Firms highlighted the DACH region as an area of ongoing interest, particularly Germany
• Digital businesses, and organisations with strong online propositions, were attractive to investors, as well as those operating in the beauty, pet and healthcare spaces
• Many firms told us that there was increased interest in businesses that were asset-heavy
In terms of geography, interest is broadly spread across Europe, with one notable exception: the DACH region. Many respondents to this research mentioned German-speaking countries as targets for investments, and research from PwC found that there were a total of 1,696 deals in the DACH region in the first half of 2021 – a record figure. We’ve seen some major deals in Germany, such as EQT’s €3.5bn buyout of pet supplies business Zooplus.
Indeed, the vet and pet space has continued to attract significant investment this year. Pet ownership has increased by around 15% since the pandemic, and our discussions showed that investment directors remain focused on the industry. Recent deals include L Catterton’s investment into DTC pet food startup Butternut Box, and CVC Capital Partners’ £1bn deal to buy Medivet, the UK chain of veterinary clinics.
Away from pets, this autumn’s research showed that interest in digital, beauty and healthcare businesses has been sustained into 2021 and will continue to feature in 2022.
By contrast, one area that seems to have been short-lived as a point of consideration is asset-heavy businesses. Our 2020 report found that there was appetite for companies with significant assets – such as hotels, pubs, restaurants or commercial real estate – where there was the chance to repurpose property if needed. Nearly a year and a half on, this seems to have slipped down the agenda – with the notable exception of supermarkets, which have sizeable physical asset bases (both stores, and distribution centres).
“What’s happened is that we’ve gone from ESG being something that we seek to comply with in private equity, to something which is a source of value creation.”
Our research has also revealed that private equity funds are considering ESG more closely than in previous years. As one investment director told us: “What’s happened is that we’ve gone from ESG being something that we seek to comply with in private equity, to something which is a source of value creation.” This also has an impact on portfolio management. One firm commented that it was re-evaluating how it operates in this area, saying: “More can be done regarding the agreement of standards for our portfolio businesses, and then consciously investing and/or developing the businesses against those standards.”
Covid-19 will define a new generation of leaders, and leadership priorities have changed permanently
Covid-19 brought a new raft of leadership priorities to the fore and redefined the relationship between private equity funds and their portfolio businesses. At the peak of the crisis, private equity funds funneled their cash, time and energy into supporting their existing businesses, and made new demands of their executive leaders to ensure survival.
As part of this autumn’s research, we asked investment directors to consider the health of their leadership teams, and asked whether Covid-19 had permanently changed leadership styles within their portfolio companies.
Funds confirmed that the executives leading their portfolio companies had continued to step up into 2021, and the majority of respondents were happy with the performance of their leaders. “There’s no doubt there is fatigue across our management teams as people have been working unbelievably hard,” one investment director told us, “But I’d say the teams I work with are still sufficiently motivated to get through to a near-term exit.”
However, some funds suggested that now is the time to rethink management teams, as portfolio businesses move from recovery to growth strategies. “It’s time to get on the offence with talent,” one firm commented, “We feel strongly that now is the time, as business plans change and people rethink where they are in terms of their existing roles. We’re looking at board level, and at executive level, and really considering whether we’ve got the right team in place.”
“We feel strongly that now is the time, as business plans change and people rethink where they are in terms of their existing roles. We’re looking at board level, and at executive level, and really considering whether we’ve got the right team in place.”
When it comes to talent, we asked private equity firms which roles were being considered in a new light since the outset of Covid-19. At the height of the pandemic, the CEO, CFO, HR and digital roles were in the spotlight. Nearly eighteen months later, what’s changed?
Primarily, funds highlighted the sustained need for strong digital leadership. The pandemic accelerated technological transformation and made an online offering a business imperative, not just a nice to have. Against this backdrop, firms are looking closely at their existing digital talent and making new hires to supplement digital teams. As one firm commented: “Digital was fast-tracked during Covid, and we really pushed our CEOs to look at their teams, their tech stock and their data and get on the front foot with digital growth. I’m not talking about 10 or 20 percent year-on-year, I’m talking about a real step-change in terms of results.”
Private equity funds also highlighted the evolving role of the human resources function. One fund told us that its best-performing businesses through Covid were the ones with strong HR capabilities. “I think many don’t invest enough in HR,” a fund manager said, “because they’re thin on resource. But you have to invest ahead – and the businesses which are flying are the ones that invested in their HR capability early on.”
One global firm told us that they were re-evaluating how they thought about the HR function. “It must be someone who can add real commercial value, similar to how we think about a CFO,” its investment director said, “we need someone who can help drive a culture, can grasp the organisational structure and who understands the quality of talent that we’re trying to deliver.”
“We need someone who can help drive a culture, can grasp the organisational structure and who understands the quality of talent that we’re trying to deliver.”
Indeed, more than one firm told us that company culture had become more important since the outset of the pandemic, and that a strong HR lead was vital to spearhead conversations around new working models.
The future looks bright for the private equity sphere, but leaders – both from private equity houses and portfolio businesses – must remain alert to the rapidly-evolving consumer landscape. As one respondent put it: “the desire to consume hasn’t altered at all. And indeed, in some areas, it has increased. What has changed is the way in which we want to consume.”