December 23, 2020
We’ve all shared so much during 2020, as we have all lived largely with the same challenges together and are still sharing a relative experience that is rare for a modern post-war generation.
However, whilst 2020 will be remembered for good reasons as the year of the Covid pandemic, it was so much more than that. Not through choice, but companies and funds were presented with a substantial challenge, with some more than we might have dared thought was possible at the beginning of the crisis, accepting the challenge as an opportunity for leaders and companies to evolve their strategies faster than ever before.
It is reason for optimism to prevail at the end of a very challenging year, optimism that we hope to see continue and build upon throughout 2021.
One of the characteristics of a private equity model is that its value creation journey is held within a definitive time period. It may differ between models and funds, but ultimately unlike Plc’s there is a clear focus on value and a targeted exit date to crystallise value from the start. So, you would have thought that a year, possibly longer, of significant business interruption would challenge this model. However, it is our experience throughout the year in supporting over 100 different leadership teams and in excess of over 60 PE houses, that no one was prepared to a) accept 2020 as a lost year in trading and b) the pressure of time created by the pandemic has only strengthened the clarity of focus.
As a firm who supports private equity funds pre deal, we are delighted to see that the volume of pre deal opportunities, after an initial set back, has returned strongly. Even with the prospect of Brexit during 2021 still looming, it has not dampened the appetite to invest in quality businesses and high calibre leadership teams.
However, the optimism that I feel from what we see, isn’t evenly spread across all sectors, as some have borne more of the brunt from the after wake of the initial shock delivered from the pandemic than others, creating fresh challenges for 2021. Looking forward we have invited leaders to share their views on what they believe the outlook for 2021 might look like within their sector.
Financial services have stood up to the challenges of 2020 pretty well, a view shared by one its leading Chairs, Martin Baines, formerly CEO of Quilter and currently Chair of a number of PE backed Financial Services businesses.
He says: “Private equity is cash heavy and the appetite for Financial Services assets isn’t going away. The Financial Services sector is coming out of 2020 in a good place; assets have recovered any lost ground from earlier in the year, both across plc and PE, and flow is still happening. I think 2021 will see a lot of M&A in Financial Services, whilst my view remains ‘Bullish’, Brexit could be a problem – I foresee that there could be an 11th hour deal with the Germans getting involved; this could end up being the real NYE celebration. Also, I hope to see a wealth roll up – and no shortage of advisors to buy.”
In contrast, we can all see how dramatically the high street is changing and how we have all evolved as consumers developing new habits that might drop off when we are able to return to a pre-pandemic era. As several Chairs across this challenged sector observed for 2021, there is a general sense that a key focus of next year will be on Direct-to-Consumer (D2C) models and businesses. Many will look at how to get valuations right – where businesses aren’t ‘Covid pumped’, as it will be hard to see true valuation when people are still at home.
For the travel and leisure sectors, those exposed will probably not invest as it would mean a high-risk approach to investors based on what has occurred during Covid, so it will be interesting to see who might steal this opportunity. Consolidation in key markets will most likely occur, and another big theme expected to see next year will be early exits and secondary deals; and the IPO market is already becoming attractive to companies within this sector.
By comparison, Hamdi Conger, a serial Chair of international industrial firms has a view which is more relevant to the Brexit discussion and result, as potential tariffs on both imports and exports will have a profound effect on businesses.
He states: “I believe European economies will start their journey to going back to normal during 2021, timing will differ from country to country but mostly from Q2 onwards. I expect most industrial companies which experienced sales downturn between 10-40% during 2020 to get back to 2019 run rates towards the end of 2021. Therefore, any real growth in sales over 2019 is likely to be materialised during 2022. Most of the PE houses are keen to do new deals and I expect 2021 to be a very active year across Europe. General expectation is that Q1 and Q2 are likely to be very busy with increasing numbers of M&A activity, including corporate carve outs coming to market. We have already seen during recent months corporates are viewing their future strategies and putting parts of their business that do not fit in up for sale.”
Closer to home, the UK economic forecasters in construction face different challenges. As Mark Eburne, CEO of Sigmat, expresses: “Offsite construction continues to gain momentum, with revenues growing across the industry – even with the Covid challenges. Hopefully in 2021 we will see this trend continue. Government legislation is shaping environmental driven changes in automotive, aviation and energy. Hopefully we will see similar focus in construction and the use of concrete, which is far more polluting than most people appreciate.”
Nonetheless you can’t think about Brexit without considering immigration and the impact that this might have on the profile of the labour force that the UK requires to grow GDP, to help reduce the national deficit. William Macpherson, Chair of Learning Curve, voices his thoughts on what he hopes 2021 will bring to the education sector.
He shares: “With more unemployment and likely less EU migration, 2021 must see a huge step up in the reskilling of Britain. The apprenticeship and further education sectors are complex, multi-faceted systems with many operational challenges – but they are the key delivery mechanisms to deliver job outcomes. The government’s support for the right to have a funded Level 3 programme is excellent news; and hopefully there will be creativity in the topics of study and the ways to follow your training. In the land of Zoom and Teams, we need to be even more flexible about how learners choose to learn. A more imaginative approach to success would also be helpful. As a training provider, if your learner leaves the programme because they have been promoted by their employer into a better job, it currently counts as a failure from your programme. This needs to change.
For Higher Education, it would be great to see acceleration in the flexibility of the study model, as the current 3-year full time student model was developed for another era. Increasing provision of faster (a two year) or slower (a four year) study would be a good start. More innovative and longer term benefits, with much more portability of credits, so a student could perhaps start as a degree while working full time in a coffee shop or similar possibly living at home; then attend a university full time for the second year, and then finish study in a near-graduate job as a degree apprentice. If properly implemented, it could dramatically reduce a typical undergraduate student debt.”
Although, whilst we focus on the business outlook for 2021, you don’t have to look that far to be reminded of the recent challenges we have undergone and how we have come to heavily rely on critical sectors and whether the recent experiences are shared by all. Sectors such as education and care are the beneficiaries of a more profound change to their industry. Bill Colvin, Chair of Chatsworth Schools and European Lifecare Group, shares his views for 2021.
He says: “Events during 2020 have magnified the inequalities inherent within the UK health and social care workforce. Unquestionably front line healthcare staff faced the greatest risks of infection and illness from this unknown virus back in those early spring days of 2020 and yet every one of them continued to provide very high quality levels of care 24 hours a day to all residents and patients under their care.
My hope for the sector in 2021 and beyond is that the level of reward and recognition for this entire workforce improves significantly to reflect their amazing contribution. Phrases like ‘zero hours contracts’ and ‘minimum wage’ shouldn’t be anywhere near this sector in future considering what this workforce achieved and the sacrifices they made during the most challenging year in all our living memories.
Better employment terms and conditions for this entire group, more dedicated training resources along with a recognised care qualification, will allow all care providers to enjoy a stable permanently employed workforce and make health and social care a more attractive career.”
No one would suggest for a moment that 2021 won’t be without significant challenges, two of which we can already see, Brexit and the continuing effects of the pandemic. However, challenges also bring opportunities and it is these unforeseeable positives that we choose to think about when welcoming in 2021.