Alts Investors Expect Deal Activity to Return in 2021

Alternative investment professionals are optimistic about the industry returning to its pre-pandemic form by this time next year, as nearly three-quarters of them expect to see deal activity get back to normal by the fourth quarter of 2021, according a recent survey from professional services firm EisnerAmper.

The survey polled 259 CIOs, chief financial officers (CFOs), chief operating officers (COOs), chief accounting officers, controllers, portfolio managers, and operations specialists, and found that 74% of them believe the industry will return to its pre-pandemic form by the end of next year, while 41% were even more optimistic and said this will occur by the end of the first half of 2021.

Deal-making in the alternatives industry—particularly in private equity, venture capital, and hedge funds—was temporary halted in March when the COVID-19 pandemic led to a global economic crisis and changed the how deals were made. However, the survey found that investors learned to adjust to the new reality by working remotely as 80% of private equity executives said they have been able to satisfactorily conduct deal due diligence during the pandemic.

“The alternative investment industry has remained resilient during a year that no one could have predicted and has adapted quickly and efficiently to the challenges that the global pandemic has posed,” Peter Cogan, managing partner of EisnerAmper’s financial services industry, said in a statement. “The survey findings unveil a fairly optimistic outlook, even as uncertainty lingers amid the upcoming presidential election and rising COVID-19 cases.”

And while deal-making is expected to return to normal in a year, the way those deals are conducted will likely change forever as 73% of survey respondents said they expect in-person site visits and management meetings to decrease post-pandemic.

Although 2020 was a year unlike any other for the industry, not everything, changed, according to the survey. For the second year in a row respondents said they expect the technology and health care/life sciences sectors to be the industries that present the best chance for growth during the fourth quarter of this year.

The survey also identified other trends in the industry, as 32% of private equity and venture capital professionals said their biggest challenge was finding diversified deals to add to their portfolios. Another 21% of respondents said their No. 1 challenge was US trade policy inconsistency, while 19% cited cybersecurity as their top challenge.

Additionally, while many private equity and venture capital firms enacted hiring freezes at the beginning of the pandemic, 56% of respondents said they plan to resume hiring over the next 12 months, with 76% of those expecting to bolster their operations teams, and 52% saying they will add to their investment teams.

“Planning to resume hiring in 2021 is a strong indication that the private equity industry is recovering from the disruption that the pandemic caused in the first half of the year,” Cogan said. “Furthermore, as private equity firms face the challenge of finding diversified deals, recruiting fresh talent is vital to help realize new opportunities.”

The survey also found that while limited partnerships (LPs) have provided liquidity for fund managers in recent years, several factors could change this, as 36% of respondents cited a second wave of COVID-19 leading to another economic shutdown as the main issue that could most impact limited partnership liquidity. The other major factors cited by respondents were poor market performance (23%), changes to tax regulations (21%), and the outcome of the presidential election (20%).

Additionally, 62% of respondents said they don’t expect limited partnerships will make significant shifts in their investment allocations over the next 12 months. And with the alternative investment industry increasingly focusing on environment, social, and governance (ESG) strategies, more than two-thirds of limited partnerships said it is very important (26%) or somewhat important (41%) to invest capital in ESG-related funds and companies.