Playing it safe(r) – why is Private Equity favouring ‘safe stocks’?

In our last article we explored the challenges for Private Equity in the resurgent M&A market. It’s a seller’s market, and in what seems to be a race to put money to work and get a head start as economic recovery gathers pace, we continue to see a number of deals fail due to a lack of proper preparation or a lack of clarity regarding post-Covid projections. Interestingly, and it seems somewhat paradoxically, there is also an increase in Private Equity investment in what have been most recently ‘dormant’ sectors for buy-out funds.

With Covid creating a level of ambiguity and uncertainty in relation to deal-making, and portfolio diversification playing a larger part in fund strategies, it’s understandable that funds will seek some sanctuary in less volatile investments. So, while Healthcare and TMT continue to run hot, where are we seeing the uptick in Private Equity investments in other sectors?

Consumer products for one is seeing some interesting activity. This has traditionally been a sector that was a challenge given its complexity, low margins and limited opportunities to create high levels of value. Now, possibly buoyed by changes in consumer appetites, and the potential for increased levels of complementary M&A, it’s looking increasingly attractive to Private Equity.

Similarly, we’re seeing Packaging businesses gaining the attention of Private Equity once again. With increased consumer consciousness around packaging materials and the environmental impact of businesses, there is a real opportunity for Private Equity firms to deliver significant transformation as a result of supply chain disruption driven by ESG. We have commented in the past on Private Equity’s ability to accelerate transformation away from the near term demands of shareholders and, with ESG issues increasingly prominent in consumers’ minds, packaging offers some attractive opportunities under a ‘PE Lens’.

For Private Equity this is an interesting time, if not a turning point, as the immediate disruption of the pandemic dissipates there is an opportunity to play a key role in revitalising certain businesses and sectors such as Consumer, Packaging and also Services. But, multiple disruptive forces remain at play and many of these have been accelerated by Covid. Private Equity is almost uniquely positioned to deliver transformation at the pace and scale required in numerous businesses. Balancing out the potential gains with some safer investments may well prove to be the smartest play as we continue to live in uncertain times.