Private Equity Outlook for 2022 and Beyond

As we enter year three of the global pandemic, let’s take a look at its impact and other influences on the outlook for private equity (PE) in 2022 and beyond.

The Macro-Economic Perspective

The global economy continues on a recovery trajectory after the pandemic-driven standstill in 2020 and the initial rebound in 2021. The arrival of vaccines in 2021 offered a lifeline to humanity and a means for countries to restart their respective economies, albeit at different paces between developed and developing economies. Overall, business activity ramped up in the later half of 2021 and is expected to keep pace in 2022, marred occasionally by outbreak surges. New viral variants such as Omicron poses risks to the recovery, but it may yet herald an escape from the pandemic abyss to lead us into the endemic phase of Covid-19.

Beyond the pandemic, cultural and political upheavals continue to disrupt economies around the world, with natural disasters such as floods and typhoons becoming ever more prominent impacts of climate change coming to the fore.

Global Real GDP, Trade and Inflation Growth

Malaysia in particular is seeing a resumption of most economic activities, with the reimposition of nationwide lockdowns deemed unlikely in current forecasts. The country’s gross domestic product (GDP) is expected to reach 6.8% in 2022, up from the estimated 3.8% in 2021, riding on the rebound led by Malaysia’s vaccination progress and ongoing booster roll-out.

Gross Domestic Product by Aggregate Demand, 2020 – 2022 (at constant 2015 prices)

The accommodative monetary policy is expected to continue supporting growth in 2022, backed by a resilient banking sector with sufficient liquidity and capital buffer. The recent launch of the Capital Market Masterplan 2021-2025 will ensure Malaysia’s capital market remains robust, relevant and sustainable to drive the growth of an inclusive economy.

Meanwhile, trade sanctions on human rights and labour issues that gained traction in 2021 will continue to be a concern for Malaysian businesses going forward.

What This Means for Private Equity

All in all, despite the massive disruption of the pandemic, private equity has emerged relatively unscathed. Although initially affected by the early shocks of the pandemic fallout, private equity activities and dealmaking quickly resumed in the second half of 2021, driven by pent-up demand that is likely to impact 2022’s deal numbers. The economic downturn bodes well for PE, which finds plenty of opportunities to secure distressed assets and ride the eventual recovery.

Focus areas will remain in sectors and industries insulated from or enhanced by the ongoing pandemic, such as financial services, healthcare and technology, and the intersections of those areas such as software-as-a-service (SaaS) that rides on post-pandemic trends such as Work-From-Home (WFH) arrangements.

Global PE buyout deal count

PE firms will need to be more selective as deal-making in these sectors are at record highs, raising valuation prices that reduces room for error on estimating returns. Assessments will need to be more precise and thorough, surveilling a multitude of risks that would have been considered unexpected in the pre-pandemic era. Deep sector and subsector expertise will come in handy to better assess the potential and how best to take advantage of the changing industry norms and customer expectations.

Trends in the PE Market

• Rise of ESG Investing

The heightened focus on Environmental, Social and Governance (ESG) matters as drivers of sustainability in 2021 will continue to impact investment considerations rather significantly as we move into 2022.

Regulatory pressures as well as the demand from institutional investors to incorporate ESG risk assessment into valuations has a knock-on effect in the private equity market as well, which saw PE firms aligning their investment portfolios to better reflect an ESG-driven valuation assessment. Deals will be impacted by the value creation opportunities or value erosion potential based on the investment’s ESG risk profile.

However, the pressure for businesses to present favourable ESG credentials and the lack of a unified ESG framework for an accurate and consistent comparison across countries and industries makes the assessment challenging, potentially masking inherent risks.

• Proliferation of SPACs

Another significant change in the market landscape is the rise of Special Purpose Acquisition Companies (SPACs) in 2020, adding more than USD40 billion in capital competing for buyout deals. SPACs are publicly traded shell companies created for the sole purpose of raising money through an Initial Public Offering (IPO) to acquire or merge with an existing operating company.

Arguably the most prominent SPAC IPO on Malaysians’ radar in 2021 was Singapore super-app Grab’s December 2 debut on New York’s Nasdaq, raising USD4.5 billion in the largest IPO by a Southeast Asian company in U.S. history. That figure is dwarfed by the volume of proceeds raised through SPAC IPOs, which totals USD104 billion in the first half of 2021 alone, far surpassing full-year totals of preceding years.

Global Proceeds Raised from SPACs IPO by Quarter

The boom in SPACs has both negative impact and positive opportunity for PE companies. On one hand, SPACs target the very same companies that PE firms look to buyout, increasing competition and complicating investment valuations. It also provides an attractive alternative path for private companies seeking a more direct access to public markets.

On the other hand, the SPAC IPO route also serve as an alternative exit strategy for private equity sponsors to offload their portfolio, which would traditionally sell its portfolio companies to corporate buyers, other PE firms or take it public through a traditional IPO route.

With over 400 SPACs in the market searching for target companies to merge or acquire before the clock runs out on their charter, there is both opportunity and competition abound for the PE market in the near-term.

• Increased Specialisation in Private Equity

While PE firms have traditionally been equated with buyout firms, this definition is gradually shifting as more private equity companies expand into other categories such as growth, venture capital and distressed assets. Buyout funds constituted 41% of the global private equity Asset Under Management (AUM) in 2020, down from 62% in 2010.

Now, firms are differentiating their value creation model with clear areas of expertise and diversifying their portfolio with subsector funds, growth funds, ESG funds and in alternative asset classes.

Classic vs Specialist PE Funds

Outlook

All these trends and developments make for an exciting 2022, where PE activity levels are bouncing back in tandem with the economy as the threat of the pandemic dissipates. The PE market that has built an industry on challenging the status quo will continue to evolve with the changing economy and shifting social sentiment, taking into account all these factors to navigate the investment future of 2022 and beyond.

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