Armstrong director Tom Raymond reflects on learnings from 2020, how to manage H1 2021 and what we might expect from a post-Covid world.
Finally, we have all bidden a hearty and contemptuous adieu to 2020. And so to 2021, which held for many the optimistic promise of a new chapter and a page turned, both for the pandemic and economically. That didn’t last long, did it?
This article will reflect on what we learned in 2020, how to manage during H1 2021 - essentially 2020 part II - and what we might expect from a post-Covid world, likely in H2 2021/early 2022.
What did 2020 teach us?
● Macro-economically, there was a multi-year leap forward in longterm trends, particularly digitisation across entire sectors such as retail
● The deepest recession in 300 years gave way to a frothy second-half market driven by yield compression/low cost of capital, Covid catch-up deployment of capital, turnaround investment, carve-outs from distressed corporates, management teams seeking bolt-on acquisitions, and widely-expected CGT increases
● This led to bilateral deals and process pre-emption to avoid high auction multiples
● The rise of conviction investment required high-quality diligence - and still does - to validate investment hypotheses, challenge bullish business plans, supplement, and sometimes replace vendor CDD. Pre-bid, top-up, and replacement CDD were widespread. My colleague Mike Callow reflected on this in Real Deals
● Innovation, particularly digital, moved further, faster, and into darker corners in 5 months than in the previous 5 years. Even laggard sectors such as healthcare and legal services are engaging in technology change that was previously unconscionable. Investment opportunities are greater in such sectors than they have been for many years. Mike Callow and Mark Maunsell of Clearwater International reviewed technology innovation opportunities here
● Early-stage engagement with advisers was - and remains - increasingly valuable for investors. Sharing industry knowledge helps triage opportunities, focus effort in high-value targets, shape investment hypotheses, and improve early engagement with management
● Refinement of management strategy through the commercial due diligence process was increasingly valuable in these times of extreme change. Mike Callow discussed this with long-term Armstrong client Richard Shaw of GCP and Lee Campbell of CubeLogic. Click here for the full article
What are the prospects for 2021?
● Hot sectors - financial services, tech-enabled business services, healthcare, and technology, in particular, are attracting high levels of investment and multiples have risen accordingly, which is likely to continue into 2021
● Bolt-on acquisitions will continue apace, benefitting from investor familiarity as safe havens for capital deployment
● Currently, dormant sectors offer counter-cyclical investment opportunities for the bold. Timing will be critical; as government support ends but before operational reopening
● In travel, we expect a rapid rebound as pent up demand is released and people make fewer, longer, closer to home, the higher value per night trips. Using price as a proxy for hygiene standards, low group numbers, and safety. Subsectors such as premium short-haul escorted tours, luxury rural retreats and self-contained accommodation will benefit
● Private transport will rebound much more rapidly than public transport. Disruptive models such as lift sharing and ride-hailing will become plausible alternatives for commuting and leisure travel
● In business services, temporary and infrastructure fixes introduced in 2020 will be reengineered with permanent solutions for all business functions; customer acquisition, service delivery, technology, office space, people recruitment, development, and management
● If 2020/2021 could not kill a B2B event, little can. Successful operators have adapted to protect core tradex/conference revenue and enhance other channels, notably digital. But this is not simply transferring events online. Identifying the core reasons for attendance - learning, connecting, buying – and investing to deliver better customer experience for the audience will distinguish success from decline
● Built environment will benefit from infrastructure depending as governments ‘build back better’ and consumer spending as homes are upgraded now that people are spending more time in their new offices. Garden rooms, conservatories, and whole-room refits will benefit
● In a relatively stable revenue environment, financial service sector consolidation will continue, particularly in already active subsectors such as insurance brokerage, wealth management services, and technology
● Whilst a fiscal crunch is looming, companies serving the public sector are well placed to drive digitisation, process automation, and customer experience. The challenge for investors is identifying scale platforms, so expect micro-enterprise level consolidators to be the most active. Perhaps a mid-market opportunity for the mid-2020s
● Without wanting to prejudge political announcements – a fool’s game in a normal market, much less this one – the widely anticipated capital gains tax increase will be delayed or introduced incrementally during H2 2021, possibly later
● If so, this will extend the current high level of deals beyond Q1, particularly for the lower midmarket as founder-managers derisk and funds deploy capital into this high volume market
● As with any high volume market, asset quality will be variable. With the diligence market currently at or close to capacity, investors will need to triage opportunities early to avoid wasting limited time and resources
● As with most mega-trends, the impact of Covid will take longer to materialise than most expect. But when they do, the changes they bring will be deeper and more far-reaching than any of us anticipate today In summary; a busy market sustained high multiples for attractive assets and high volatility for secondary quality businesses. This will distinguish between investors with differentiated investment plans and the ability to enact them. Don’t expect a dull moment.