In light of the recent big news about COVID-19 — rates are spiking seemingly everywhere, and yet there’s the promise of potential vaccines — it’s a good idea to pause the news cycle if we want to genuinely understand the outlook in private equity (PE). What’s the pulse like at PE firms right now? What are their shared pain points and priorities? And how are their road maps shaping up for the year ahead? It’s time to dive deep.
taking the pulse: c-suite perspectives on COVID-19 economic recovery
The latest headlines around COVID-19 are in many ways representative of the pandemic news cycles in general: the narrative keeps oscillating between totally contradictory extremes. Leading with the bad news, the volume of confirmed cases appears to be increasing dramatically, both domestically and abroad. But on the other hand, there’s reason to feel a sense of genuine optimism: After all, multiple vaccine candidates have apparently demonstrated 90-plus-percent efficacy. This is great news, no matter the context. It even had the stock market briefly climbing, too.
For now, it's much too early to start predicting how this is going to shake out even six months from now. So let's just say that, while we aren't quite at the end, the beginning of the end looks to be in sight at last. Right? Maybe?
That depends on whom you ask. McKinsey currently forecasts an indefinite point in Q3 or Q4 2021 as “the most likely timeline” for realizing “herd immunity” — the point at which most people will have attained immunity to COVID-19. As a result of that, even those who are not immune will benefit from reduced risk of exposure.
But if you ask PE and venture capital (VC) fund managers what's on tap for next year, you’re liable to get a far more bullish picture. According to the most recent BDO Private Capital Pulse Survey, for instance, roughly three out of four PE and VC fund managers expect the economy to improve substantially next year. Of that group, the largest share hedged between “much better” and “slightly better” which is pretty optimistic either way. Meanwhile, only 15 percent thought the economy would get worse.
However, the survey also hinted at limits of that bullishness. Fewer than one in four respondents indicated that they plan to allocate significant capital toward new deals or investments, at least not in the next six months. And that figure was a full 20 percent higher on the same survey just one year ago. All of which points to shifting priorities for C-suite finance leaders.
the CFO’s role: new hats replacing the old
Given what we know — and where we’ve come from — where are CFOs going to be directing their energy and attention in the year ahead? The following four themes stand out, and they point to some of the subtle ways the role of the CFO has been changed, or at least inflected, by the disruptions of COVID-19.
1. business continuity is the first order of business
Together with CEOs, tech leads and business partners, finance officers must continue to be heavily involved in business continuity preparations and disaster planning efforts. We’re seeing that already, and it’s likely to become more urgent since we’re seeing a second wave of COVID-19 infections spiking globally.
2. short-term hiatus on M&A
Venture-oriented investments and growth equity, rather than traditional M&A activity, is going to be the near-term focus for most PE firms. Expect any potentially large-scale M&A to be delayed at least until Q3 2021. This, despite the fact that PE firms continue to sit on unprecedented strongholds of dry powder. C'est la vie.
3. risk awareness is paramount
Even as the year progresses, attentiveness to risk is going to be very much top of mind. For PE firms, that means proactively scoping out potential vulnerabilities — not only within their portfolios, but as part of their due diligence processes, too.
4. doubling down on tech
Strategic technology investment is another area that’s going to be critically important for finance leaders. And while the success of the endeavor will hinge on close collaboration within the executive suite — CIOs, CISOs, CFOs, CROs, CEOs and more — tactically, CFOs may have to take the lead. After all, more than 80 percent of PE investors have said that they believe automation and technology will have a transformative impact on the way finance departments operate, according to one Deloitte survey. Now, it’s their chance to prove it.
These are just a few emerging trends to keep in mind going into 2021. No one knows the exact formula for success, but it’s certainly going to entail doing new things, executing new strategies and driving change rapidly. And in the context of ongoing uncertainty, operating with greater speed, together with tighter cost controls, is going to be huge — and another reason why the right finance leadership is key.
what’s next?
As we've discussed, the novel coronavirus continues to produce novel challenges for CFOs, some of which surely count as truly watershed business challenges, too. From a hiring perspective, that likely means intense competition in 2021 for seasoned, hands-on finance executives. Those who bring relevant experience to the mounting exigencies of the moment, those with demonstrated cash management expertise who have chartered successful exits before ― no doubt these pros will command higher-than-market-average rates in the year ahead. It’s just the law of scarcity compounded by demand.
So if your organization is confronting C-suite leadership challenges today, you should know that Tatum has a long track record of success partnering with PE firms during moments of uncertainty and implementing strategies to help them navigate change. Contact us below to discover how our organizational search and consulting capabilities can be leveraged to deliver value to your bottom line.