The insight: Europe’s private
equity industry during
COVID-19 and beyond
November 2020

Content
Introduction

3

1. Fundraising remains resilient5

2. Investment environment

5

3. Postponement of planned divestments drives lower exit volumes in the market

6

4. Operational priorities during and beyond the pandemic

7

5. Private equity asset class remains attractive for LPs, but investment strategies may evolve

9

6. A changing relationship between LPs and GPs on the horizon?

11

7. LPs and GPs to remain key partners, though their interests sometimes vary13

8. The future of private equity in a “new normal”

15

Authors:

Julien Krantz
Research Director
Invest Europe
julien.krantz@investeurope.eu

Guillaume Picq
PartnerPrivate Equity, Parispicq.guillaume@adlittle.com

Jonas Fagerlund
Partner
Leader Global Private Equity, Stockholm
fagerlund.jonas@adlittle.com

General disclaimer
This report was commissioned by Invest Europe on terms specifically limiting the liability of Arthur D. Little. Arthur D. Little’s conclusions are the results of the exercise
of its best professional judgement, based in part upon materials and information provided to Arthur D. Little by Invest Europe, secondary research, and expert interviews
conducted by Arthur D. Little. Use of this report by any third party for whatever purpose should not, and does not, absolve such third party from using due diligencein verifying the report’s contents. Any use which a third party makes of this document, or any reliance on it, or decisions to be made based on it, are the responsibilityof such third party. Neither Arthur D. Little nor Invest Europe accepts any duty of care or liability of any kind whatsoever to any third party, and/or any responsibility fordamages, if any, suffered by any third party as a result of decisions made, or not made, or actions taken, or not taken, based on this document.

Introduction
COVID-19 has had an exceptional impact on society as a whole and across mostbusiness sectors. Despite the challenges, the private equity market has provenitself to be both resilient and adaptable, which makes it well positioned to takeadvantage of new opportunities that will emerge post-pandemic.
Although the full impact of COVID-19 is not yet fully known or understood, ourrecently conducted pan-European survey of private equity professionals gives
some insights into the pandemic’s effect on the industry, particularly how limited
partners (LPs) and general partners (GPs) have responded to what is still a fastmoving investment landscape, as well as their view of the private equity market
going forward.

This report is based on a pan-European survey that was conducted by Invest Europe
and Arthur D. Little during the months of July and August 2020.
It consolidates the outcomes from more than 100 limited partners (LPs) and 250 generalpartners (GPs) across geographies. LP and GP respondents represent the private-industry
diversity in Europe in terms of geographical footprint, industry sectors covered andinvestment strategy/stage.
This publication also integrates extracts from Invest Europe’s report “Investing in Europe:
Private Equity Activity H1 2020”, issued in early November 2020.
3

1. Fundraising remains resilient
Fundraising in H1 2020 remained relatively resilient, with €49.2
Bn raised during the period (according to Invest Europe’s report,“Investing in Europe: Private Equity Activity H1 2020) — just 4
percent down on 2019.
The majority of fundraising processes, approximately 80
percent, continued despite the pandemic (see Figure 1). Evenfor the 20 percent that did not proceed, this appears to be
temporary, with most expected to resume at some point.

Figure 1:
GP

Impact on ongoing fundraising process when COVID-19 struck(Europe, 2020)
0.0%

20.0%

Fundraising process speeded up

40.0%

60.0%

80.0%

100.0%

5.8%

Fundraising process stopped but was oris expected to restart(ed) later

18.7%

Fundraising process slowed down

54.7%

No impact

20.9%

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

2. Investment environment
After a promising first quarter of 2020, the Europe-wide
lockdown that lasted from March to the beginning of June
not unsurprisingly led to a pause in investment, with reduced
transaction volumes leading to levels that were 17 percent lessthan those of the previous year (€36.2 Bn in H1 2020 comparedto €43.4 Bn in H1 2019), according to “Investing in Europe:
Private Equity Activity H1 2020”.
Any activity occurring since the mid-summer “restart” hasprimarily revolved around the conclusion of deals already begun
by private equity firms before the first lockdown period inEurope.
This rather downbeat dynamic is likely to continue over the next
six to 12 months in the European private equity market, with 55
percent of GPs and 60 percent of LPs expecting the downward
trend in transaction volumes to go on.

Despite the turbulent context, GPs do see opportunities arisingin the market, with 46 percent (see Figure 2) believing that overthe next six to 12 months there will be stronger investment
opportunities in the market, mainly driven by more corporate
spin-offs (43.5 percent) and, to a lesser extent, more primary(37.9 percent) and secondary deals (38.8 percent).
Figure 2:GP

The perception of investment opportunities in the market
within the next 12 months compared to 2019 (Europe, 2020)
0.0%

20.0%

40.0%

Stronger

Neutral

Weaker

60.0%

80.0%

100.0%

46.0%

35.5%

18.5%

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

53. Postponement of planned divestments
drives lower exit volumes in the market
Divestments have particularly been impacted by the pandemic.
Over the first semester, these were down by 49 percent on thesame period in 2019. A majority of GPs have postponed exits ofportfolio companies and are expected to continue to do so until
2021. That will give private equity firms more time to thoroughly
assess the market conditions for a structured exit process when
trading numbers have returned to an upward trend.
In the short-term, more than half of GPs expect divestment
opportunities to be lower. This is likely to remain the prevailingmood well into 2021.
This somewhat negative outlook is also present when looking
at valuation multiples, with 50 percent of GPs and 60 percent of
LPs taking the view that they will be down on 2019 (see Figure3).
As a result, short-term returns for the majority of private equity
professionals are likely to be lower than the levels achieved in
2019.

6

Figure 3:
GP

Developments of PE transaction market in the next 6 to 12
coming months compared to 2019 (Europe, 2020)
0.0%

Number of transactions

20.0%
18.2%

Valuation multiples 11.7%

Return on investments

13.6%

40.0%

60.0%

25.2%

80.0%
56.5%

37.9%

50.5%

36.0%

50.5%

Higher

Same

Lower

LP
Number of transactions

Valuation multiples

Return on investments

12.9%

5.4%

18.3%

25.8%

61.3%

36.6%

58.1%

34.4%
Higher47.3%
Same

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

Lower

100.0%

4. Operational priorities during andbeyond the pandemic
When the pandemic struck, most PE firms rapidly set up various
internal teams to provide support to their portfolio companies.
These teams were primarily focused on ensuring employee
health and safety, securing supply chains, maintaining operations
remotely, short-term cashflow planning and the like. As a resultof such a different modus operandi, fewer resources wereavailable for new deals or exits, as described above.

“We were very quick at setting up ‘war rooms’
for key issues across our portfolio companies.
For several weeks, we also held daily telephone
conferences with each portfolio company to ensure
we were in control of the situation .”Martin Kõdar, Managing Partner, BaltCap
In light of our experience from the pandemic, we also asked
what the primary focus of PE firms was now (see Figure 4), andalso what would be the most important improvement initiatives
for their portfolio companies (see Figure 5). The results depict
the reactivity of the firms towards their portfolio companies, aswell as their LPs.
Figure 4:GP

Effective portfolio management has risen rapidly up GP teams’
agendas and is likely to remain so for the next six to 12 months.
For instance, 70 percent of GPs anticipate allocating moretime to operational development and support of their portfolio
companies.
Figure 5:

Most important improvement initiatives being run in portfolio
companies at the moment1 (Europe, 2020)

GP
75.5%

Cost reduction
47.0%

Digitalization
Organic growth

40.0%

Liquidity financing

37.5%

Acquisition-led growth

27.0%

Right sizing

27.0%

Sustainability

21.5%

Geographical expansion

20.0%

Source: Arthur D. Little analysis, Invest Europe Private Equity survey
Note: 1) Multiple choices were possible

Main GP focus in the near future compared to 2019
(Europe, 2020)
0.0%

20.0%

Operational
development of/support to portfolio
companies

80.0%

46.1%

47.0%

50.0%

37.8%

48.3%

27.8%

Same

0.4%

1.7%

3.0%

13.9%

67.0%

More

100.0%

28.3%

52.2%

Proprietaryorigination

Due
diligences

60.0%

71.3%

Regulatory,compliance and IR
communication tasks

Exit of portfolio
companies

40.0%

5.2%

Less

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

7In terms of the most important improvement initiatives, cost
reduction comes out as the main focus for value creation, with
75 percent of all respondents stating that it is “very important”.
Unsurprisingly, digitalization is a key interest for 47 percent ofrespondents, which reflects the need to accelerate digitalization
as a result of the pandemic.
Liquidity financing remains a key agenda topic for 38 percent ofrespondents. With a second wave of coronavirus already rollingout across Europe, this figure may well rise in response. Recent
lockdowns in Ireland, the UK, France, Germany, Belgium andlikely elsewhere very soon are raising the prospect of frontierclosures, curfews and even civil disorder, which means many
companies may have to rely on their existing reserves to rideout the coming storm — even if that storm is shortened by thearrival of a vaccine for COVID-19, such as the one announced on
9th November by German VC-backed laboratory BioNTech andPfizer.

8

During these difficult trading conditions, traditional financing
such as loans and credit facilities from banks and shareholders
have been used to support portfolio companies. On average
44 percent of portfolio companies have used government
unemployment support, and 37 percent have requested andutilized government-backed loans for financing. (This was
especially the case for portfolio companies in VC funds andmidcap PE funds.) To a large extent, portfolio companies’
requests for government support have been approved, except
for VC-fund portfolio companies, for which about one-quarter ofrequests were rejected. This situation demonstrates the relative
resilience of the private equity industry in the current difficultcontext and will most likely remain the case over the coming
months.

5. Private equity asset class remains
attractive for LPs, but investment
strategies may evolve
Irrespective of the short-term situation, the private equity asset
class remains a favorite investment for LPs — 60 percent of LPs
and GPs expect there to be greater capital allocation to this area
over the coming three years, with only a few (15 percent of LPs)
taking a contrary view.

“Right now, there’s no other asset-class that canmatch the PE asset class in terms of risk-reward
profile, particularly in the current low interest rateenvironment .”Eric de Montgolfier, CEO, Invest Europe
However, four out of 10 LPs also say they are looking tocapitalize on other investment opportunities arising from the
COVID-19 crisis by redirecting their investments into distressed
asset or secondary-asset funds.
As regards alternative investment strategies, over half of GPs(57 percent - see Figure 6)) see no reason to change tack at
the moment, though nearly one in three private equity firms
have concluded that the current context may justify looking at
investments in new geographies, deal sizes and sectors.

Figure 6:

Expected areas future funds will grow into1 (Europe, 2020)

GP
Same areas as today

57.8%

New geographies

30.0%

New industry sectors

30.4%

Changes in size oftarget companies
Invest in public equity

35.7%

6.1%

Source: Arthur D. Little analysis, Invest Europe Private Equity survey
Note: 1) Multiple choices were possible

Overall, some sectors are seen as holding the greatest promise:around two-thirds of GPs expect higher investment activity inbiotech, medtech, life sciences & healthcare, deep tech and ICT
and, to a lesser extent, renewable energy, business services
and agribusiness, which about four in 10 respondents regard
favorably (see Figure 7).

9Figure 7:
GP

Expected investment operation activity levels compared to 2019 in terms of target sectors (Europe, 2020)
0%5%

10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%

Biotech/medtechLife sciences & healthcare
Deep tech
ICT
Renewable energy
Business services
Agro business
Financial services
Energy & utilities
Transportation & logistics
Infrastructure
Consumer goods and retail
ChemicalsIndustrial equipment
Aerospace & defense
Tourism & leisure
Advertising/media
Automotive
Real estate
Construction & building materials
Higher

Same

Lower

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

At the opposite end of the spectrum, COVID-19 has had, andcontinues to have, a deep and significant impact on major
sectors such as tourism and leisure, automotive, real estate(professional) and aerospace and defense (especially theairline industry). Consequently, in the medium term, thesewill probably be regarded by GPs as offering less investment
potential.

1076. A changing relationship between LPs
and GPs on the horizon?
Among both LPs and GPs, there is an expectation thatthe “new normal” we have entered into will change therelationship between them in ways that have potential long-term
implications for the industry (see Figure 8). Almost half of LPs
believe, for instance, that future limited partnership agreements
will become more “friendly” towards them. However, themajority of GPs don’t expect any fundamental change in theirrelationship with LPs.

Figure 8:

Expected changes in daily operations in the near future,
regarding . . . .(Europe, 2020)GP
The attention torisk management

68.4%

31.2%

0.4%

Investor relations
communication
towards the LPs

70.1%

29.0%

0.9%

More

With continuing widespread volatility in the marketplace, acommon view among 40 percent of both LPs and GPs is thatthe scope of investment will extend further (see Figure 9). If
that is the case, then GPs should be able to take advantage of
new opportunities. This would enable them to diversify theirinvestments, which would afford some protection when they
are faced with future volatile conditions and macro events thatcreate turbulence in the market, COVID-19 related or not.
Because of the uncertainty facing the private equity sector,
GPs believe that they should place much greater emphasisin the future on risk management and investor relations (IR)communication activities.

No change

Less

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

Figure 9:

Expected changes in the way allocated capital is managed
towards the Private Equity asset class regarding. . . .
(Europe, 2020)

LPYour attention torisk management
Investor relations
communication
towards the LPs

54.8%

45.2%

49.5%
More

49.5%
No change

1.1%

Less

Source: Arthur D. Little analysis, Invest Europe Private Equity survey

However, when LPs were asked the same question, they did
not place as much emphasis on either risk management or IR
communication. It seems LPs are more satisfied with the way
GPs are working than GPs themselves.

“During the early stages of lockdown, we wereparticularly pleased with the quality and frequencyof the information we were getting from most GPs.
That was both helpful and reassuring that they
were on top of their portfolios.”
Merrick McKay, Head of Europe - Private Equity, AberdeenStandard Investments

117. LPs and GPs to remain key partners,
though their interests sometimes varyMoving forward, there is still confidence among LPs that GPs
will remain key partners; however, they would like to see somechanges. So, while they value what might be regarded as the“traditional criteria” (see Figure 10) for judging the relationship,such as the GP team’s experience, track record, investment
strategy expertise and sector knowledge, they are also looking
for some new attributes that currently are often either absent
from GPs or not recognized as important by them.
Figure 10:

GP

Most important factors for a PE firm to differentiate itself
within the Private Equity market1/Most important factors
when selecting GPs2 (Europe, 2020)
LP
74.0%

Investment partner
team experience“Investing is more than just optimising returns.
We have a shared responsibility to make the world
a better place. As investors, this means we have tobe proactive in making sure our GPs contribute tosustainability.”
Jesse de Klerk, Partner, Stafford Private Equity
In two other areas there is a similar mismatch in thinking. The
first is the governance of GP firms, something that was animportant factor for 65 percent of LPs, while only 15 percent of
GPs indicated that it was of value to them. Also, the experienceof a GP’s internal operating team was thought important by LPs,
but much less so by GPs.

92.5%
68.0%

Investment strategy

87.1%
66.7%

Past performance/return

92.5%
57.6%

Sector knowledge

GPs have spent a great deal of time managing companies intheir portfolios during the pandemic and are likely to continue todo so. However, for LPs it is important that they see dedicatedoperational teams “on the ground” that can support portfolio
companies and help steer value creation, especially during thecurrent situation.

77.4%

Evidence of proactive
support of PE professionals
to their portfolio companies

50.2%

Figure 11:

57.0%
General Partner

Most important factors for a PE firm to differentiate itself
within the Private Equity market1/Most important factors
when selecting GPs2 (Europe, 2020)

Limited Partner

Source: Arthur D. Little analysis, Invest Europe Private Equity survey
Note: 1) Questions asked to GPs; 2) Questions asked to LPs

GP

LP
34.6%

Approach to ESG

For example, environmental, social and governance (ESG) is
clearly something that matters to LPs, since 70 percent define it
as one of their key criteria (see Figure 11). However, ESG did not
really appear on the radar of GPs; fewer than half indicated that
it was something of particular importance to them. The recent
Sustainable Finance Disclosure Regulation that is expected toapply from March 2021 will probably increase the need for GPs
to put greater emphasis on ESG.

72.0%
22.1%

Operating partner
team experience

51.6%
16.5%

PE firm governance

Deal size (EV) focus

Equity investment per deal

65.6%
7.8%
35.5%

10

3.9%
20.4%
General Partner

Limited Partner

Source: Arthur D. Little analysis, Invest Europe Private Equity survey
Note: 1) Questions asked to GPs; 2) Questions asked to LPs

138. The future of private equity in a “newnormal”
Because of COVID-19 and the response to it, we haveentered a period of uncertainty, and potentially high volatility.
Unfortunately, with the pandemic accelerating across Europe,
there is little sign of this crisis bottoming out in the immediate
future.
So, it is likely that in the short-term at least, COVID-19 willcontinue to dampen the private equity transaction market with alower level of deals and potentially reduced valuation multiples.
Given what is likely to be fierce competition in the marketplace
as we move out of the pandemic, there is still a higher risk
attached to the PE portfolios of today than those of a year ago.
So, the private equity industry must adapt to this “new normal”
as best it can, and just as it always has in the past.
Despite the many problems it has brought, COVID-19 has
highlighted the efficiency of the PE industry’s business model —the high degree of responsiveness from GPs and support fromLPs have minimized the impact of the pandemic on exit timing,
helped protect portfolio companies and created real value. As
a result, private equity has globally remained the favorite asset
class of LPs.

The pandemic is also likely to bring about a new era ofprofessionalism. For instance, the setting up of dedicated teams
to manage portfolio operations, as many larger firms alreadyhave done, will become much more widespread and greaterattention will be paid all round to ESG, especially in the wake ofrecent changes in regulation.
It is also likely that the current relationship between GPs and
LPs will move beyond the transactional as better communication
and understanding lead to wider recognition that protecting thevalue of their shared investments is of common interest.
However, the impact of the current crisis will require
further assessment if we are not just to limit the negative
consequences of COVID-19, but also to anticipate and seize newpotential investment opportunities when they appear.
Although there is continuing turbulence in the marketplace,
we can presume that at some stage a new equilibrium will
be reached as those in the market adjust their approaches toaccommodate the new COVID-19 reality. And looking forward,
we see that there are some positive fundamentals already inplace to build on.

However, the COVID-19 crisis is testing PE’s existing businessmodel as investors move towards sustainable, resilient and fastgrowing industry sectors, such as technology, and restructure
funds to take advantage of opportunities better suited to our
new environment. Underpinning this will also be ever-greater
digitalization, which is leading to more streamlined, efficient
processes that will accelerate the rationalization of the industry.

15

Contacts
If you would like more information or to arrange an informal discussion on the issues raised here andhow they affect your business, please contact:

Austria
Lars Riegel
riegel.lars@adlittle.com

Japan
Hiroto Suzuki
suzuki.hiroto@adlittle.com

Singapore
Tomasz Izydorczyk
Izydorczyk.Tomasz@adlittle.com

Belgium
Gregory Pankert
pankert.gregory@adlittle.com

Korea
Kevin Lee
lee.kevin@adlittle.com

Spain
Pedro Ugarte
ugarte.pedro@adlittle.com

ChinaMark Peacockpeacock.mark@adlittle.com

Latin America
Cesar Brena
brena.cesar@adlittle.com

SwedenJonas Fagerlund
fagerlund.jonas@adlittle.com

Czech Republic
Jiri Steif
steif.jiri@adlittle.com

Middle East
Dhiraj Joshi
joshi.dhiraj@adlittle.com

Switzerland
Maximilian Schauer
schauer.maximilian@adlittle.com

FranceGuillaume Picq
picq.guillaume@adlittle.com

The Netherlands
Martijn Eikelenboom
eikelenboom.martijn@adlittle.com

TurkeyUtku Ozoz.utku@adlittle.com

Germany
Maximilian Schauer
schauer.maximilian@adlittle.com

NorwayLars Thurmann-Moe
thurmann-moe.lars@adlittle.com

UK
Enguerran Ripert
ripert.enguerran@adlittle.com

India
Barnik Maitra
maitra.barnik@adlittle.com

PolandPiotr Baranowski
baranowski.piotr@adlittle.com

USA
Sean McDevittmcdevitt.sean@adlittle.com

Italy
Andrea Romboli
romboli.andrea@adlittle.com

Russian Federation
Alexander Ovanesov
ovanesov.alexander@adlittle.com

The insight: Europe’s private equity industry
during COVID-19 and beyond

Arthur D. Little

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