Private companies redefine competition and their ecosystem to ensure recovery
Ryan Burke
Global EY Private Leader │ Transactions & PE advisor │ Supporter of entrepreneurs │ Neurodivergent │ Reading Advocate │ Father │ Mentor
Private companies seem to be optimistic about the future despite the challenges they’ve faced over the past year. According to the most recent EY Global Capital Confidence Barometer, a survey of more than 2,400 C-suite executives globally, who work for both public and private companies, nearly half of those surveyed (49%) expect revenues to bounce back to pre-pandemic levels during 2021, with profits due to return to similar levels in 2022. What’s more, the same percentage (49%) intend to pursue M&A. Survey respondents plan to actively make acquisitions in the next 12 months, as part of a strategy of reframing their futures and accelerating their growth in the post-COVID-19 pandemic world.
According to the survey, the top five investment destinations for private companies this year – for both domestic and cross-border M&A – are Germany, the US, France, the UK and India. Private companies with the strongest acquisition ambitions are likely to come from the following sectors: telecoms, financial services, oil and gas, power and utilities, automotive and transportation, and technology.
Tapping competition for a competitive advantage
The survey also highlighted that 88% of private companies are open to collaborating with their competitors in some way to create new solutions that will increase their value in the marketplace or enable them to get closer to their customers. This willingness to team with other members in their ecosystem could create some exciting opportunities for certain private companies. For others, it could be a means for basic survival; many companies are still reeling from the impact of the pandemic and a smooth recovery is by no means assured.
There are several possible explanations for why private companies are so keen to team up with industry associates, including competitors. Reasons for these newly emerging unions include an ambition to expand their reach, a desire to innovate and the potential to get new offerings and services to market more quickly. Private companies have proven to be very nimble in this regard – especially over the past 12 months. In fact, the survey indicates that private companies have adapted faster than public companies in response to the COVID-19 pandemic. When asked if companies have overperformed or underperformed across various business functions relative to their competitors, 16% more respondents from private companies said that their company overperformed against their competition compared to public companies. Similarly, 28% more public companies compared to private companies noted that their company underperformed, indicating private companies have shown greater adaptability in both instances.
Private capital drives the demand for assets
In addition, the survey revealed private businesses are finding that the greatest competition for assets will come from private equity (PE) and other forms of private capital rather than rival corporate buyers. More than half (60%) of respondents said they expected to see increasing competition for assets from private capital over the next 12 months. This reflects the overall sum that PE firms have available to invest – an estimated US$2.8 t in dry powder, including nearly US$ 1 t that is specifically dedicated to buy-outs.[1] Similarly, family offices (FO) are likely to have significant dry powder due to the estimated US$15.4t wealth transfer across families in the US alone by 2030.
This abundant private capital in the form of PE and FO dry powder has also led to the recent wave of single purpose acquisition companies (SPACs). SPACs grew more than 500% in value from US$13.6b in 2019 to US$83.1b in 2020 and currently there are more than 330 active SPACs looking for a target.[2]
Geopolitical threats held back investments more than the COVID-19 pandemic
While the COVID-19 pandemic stalled many aspects of business as usual, EY Global Capital Confidence Barometer results revealed that the pandemic was not the main reason for private companies failing to complete a planned acquisition. Rather, disagreement on price or valuation was cited by 39% of respondents, while 18% had concerns around competition or antitrust reviews. A comparatively small amount – 15% – cancelled a planned acquisition due to the pandemic.
If anything is likely to stand in the way of private companies’ pursuit of strategic investments, it is likely geopolitical events, including trade wars and major political and regulatory decisions. When asked if geopolitical challenges are forcing respondents to alter strategic investments, the survey found that nearly two-thirds (61%) of private companies are delaying a planned investment until they get further clarity in certain areas, while 39% admitted to having halted a planned investment over the past 12 months.
Fit for a post-pandemic world
The disruptive forces that are impacting private companies today won’t fade as vaccinations rise. The COVID-19 pandemic has totally recast and reset the competitive, economic, geopolitical and social environment in which they are operating. As a result, executives will want to ensure their company’s strategy is fit for the post-pandemic world. This may mean making bold moves, such as acquiring innovative start-ups or entering into cooperation with competitors.
Post-pandemic fitness will also involve looking after their company’s talent, understanding its future consumer, conducting strategic reviews and investing in appropriate technology. A majority of survey respondents (84%) noted pandemic-driven strategic reviews are already underway. Of those conducting reviews, 61% said that the reviews process has been accelerated by the COVID-19 pandemic.
Finally, in all the decisions they make, the executives of private companies can’t afford to simply focus on the now. Their decisions should aim to create long-term value – consumer, human, financial and societal – in line with their corporate purpose. This will better enable private companies to not only restore their performance to pre-COVID-19 pandemic levels, but also to reframe their futures for even greater success in the post-pandemic world.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
[1] Source: Dealogic, EY analysis, Data as of January 4, 2021.
[2] Source: Dealogic, EY analysis, Data as of February 19th, 2021.
Associate Director | EY Private Analyst
3 年Great empirical insight into the adaptability of private companies - "When asked if companies have overperformed or underperformed across various business functions relative to their competitors, 16% more respondents from private companies said that their company overperformed against their competition compared to public companies. Similarly, 28% more public companies compared to private companies noted that their company underperformed, indicating private companies have shown greater adaptability in both instances.?"
Delivering high impact global marketing campaigns | Director at EY | Traveler
3 年Really interesting read Ryan Burke