Long-term value creation in 2021 and beyond: Building resilience amid market slowdown

The year 2020 has changed the trajectory of many sectors and markets, not least the private equity (PE) market. How will the impact of COVID-19 and the ensuing economic slowdown reshape some of the private equity strategies in 2021?

Following a strong year for PE in 2019, investors were expecting a market correction in 2020, and hence were generally cautious in their investment approach and deployment strategies. As COVID-19 started spreading in early 2020, the impact on the PE market have been trickling in from the second quarter of the year to date. We witnessed deals being paused, leading to global dry powder reaching US$ 1.5 trillion at the end of Q2 2020, and investors shifted their focus towards active portfolio management, providing operational, strategic and financial assistance as required. This hands-on approach is likely to continue into 2021, specifically within worst-hit sectors. 

In Q3, we saw signs of rebound across some sectors. This has led to notable recoveries in financial markets, including PE, which is likely to benefit in the long-term. On the short-term, we expect resilient capital to remain well-positioned to take advantage of impending market corrections. Presently, they key question is: how do we build resilient portfolios that can navigate diverse investment landscapes and mitigate market volatility?

Placing a renewed focus on resilience

Besides the typical financial and risk evaluation criteria, COVID-19 has brought a new perspective on risk management and its incorporation in new deal-making and evaluation. In the new norm, investors need to deepen their commercial and operational due diligence with a renewed focus on key areas such as supply chain, sales channels and customer acquisition, workforce, and digitization. There is no doubt that investors are giving more weight to business models that have proven to be resilient during the pandemic. 

Building and maintaining a balanced investment portfolio

Diversification and balance, as well as patience, are the name of the game for PE in 2021 and beyond. According to the ‘2021 Global Private Equity Outlook’ report by Dechert LLPs, the number of surveyed respondents who said they will diversify their asset class over the next 12–24 months is down compared to last year, but the majority (57%) are still looking to diversify. Asset classes with the highest priority are specialized or niche segments (32%), followed by impact investing (23%), and private lending (23%). The drive for asset diversification brings a heightened ability to serve investors with different risk and return expectations, and to invest at all levels of the capital structure.

Sector diversification have helped investors, at a portfolio level, to weather the impact of the pandemic. As we have seen, portfolio companies have been categorized into three groups: those which were negatively impacted, such as retail, leisure, and travel; those which witnessed a positive impact driven by heightened demand for their products or services; and those which fell in between. Therefore, now more than ever, investors should utilize the benefits of sector diversification when building their portfolios.

Targeting high-growth regions

Today, we see opportunities in high-growth regions such as South and South-East Asia. Our sectoral and regional focus is driven by compelling macro-economic and demographic factors such as the significant market size of these regions, rising urbanisation within these markets, and large emerging middle-class populations with increasing disposable incomes, enabling sustainable in-country demand. We believe that there will be ample opportunities in such high-growth markets for new investments, which will favourably position investors to navigate these unprecedented times and emerge stronger.

Investing in social infrastructure

COVID-19 highlighted the weak spots across and within essential sectors that have a direct impact on our daily lives and our communities at large. These sectors, including healthcare, education, and supply chain, represent lucrative opportunities for private investments, which can address the needs and fill the gaps, forming a coherent whole and resilient value chain.

Identifying and realising synergies

In addition to building a balanced, resilient portfolio across a range of industries and geographies, investors consider potential partnerships and synergies between new investment and existing portfolio companies. New investments may allow us to create several synergies, including achieving economies of scale, the ability to cross- or up-sell, and integrate new solutions or technologies within our existing businesses. At Crescent Enterprises, we operate across four distinct platforms, which work together in synergy to develop innovative, sustainable, and profitable businesses.

Integrating ESG principles into investment analysis

Given the increasing vulnerability that businesses around the world face owing to Environmental, Social and Governance (ESG) risks, it is crucial to understand the significant role that ESG parameters play in safeguarding investments and companies, and adopt progressive ESG practices. According to a study conducted by data provider Morningstar about the long-term performance of 745 European sustainable funds, approximately six out of 10 sustainable funds outperformed equivalent conventional funds over the past decade.

Moreover, measures to mitigate the risk posed by climate change and the environment have become a common topic of discussion in global forums and boardrooms. The World Economic Forum has issued a white paper on Measuring Stakeholders Capitalism, defining a set of Stakeholder Capitalism Metrics and disclosures that can be used to unify and align corporate reporting on performance against ESG indicators and track the contributions towards the Sustainable Development Goals (SDGs) on a consistent basis. 

As a responsible investor, we place emphasis on embedding ESG principles into our investment process, and we have implemented robust internal measures governing ESG considerations in our portfolio. In 2020, we augmented our efforts in this area by identifying and aligning our focus areas with the SDGs. We are confident that adopting the framework laid out by the SDGs will allow us to both generate financial returns on investments while creating a lasting positive social and environmental impact in our regions of operation.

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