Key trends that PE fund managers and their portfolio companies are paying attention to post COVID-19

There is a shortage of labor, which can be attributed to a combination of factors, including workplace health and safety concerns, extended unemployment benefits, and lack of childcare and eldercare options. In addition to the operational challenges that the talent shortage presents, businesses have seen a deterioration in profitability as many companies are paying higher wages to stay competitive and have higher costs associated with recruiting and overtime pay for the existing workforce. Another concerning trend is employee morale. Burnout is prevalent across companies regardless of industry or size. Rewarding and retaining top talent is a critical risk right now for many companies.

Investors looking at manufacturing companies are paying more attention to the sourcing of raw materials. Investors are aware of how manufacturers and other businesses were affected in the early months of the pandemic as their supply of raw materials or finished goods dried up when shipping from and into countries was put on hold. The diversification of supply chains—not only at the supplier level, but also at the country/geography level—has become even more important.

Another dynamic coming out of the pandemic concerns baby boomer generation business owners who are ready to sell or transition ownership to the next generation. It is not uncommon for generational transitions in ownership to lead to changes in overall business strategies, including taking on investors, whether that be at a minority or a majority level. This “rush to the exits” of sorts is leading to more competition among PE investors and deals with higher valuations that are closing faster than before.

While ESG criteria are generally not part of official financial reporting, we are beginning to see LPs inquire more frequently about the ESG positions of PE funds   as they look to commit capital. On the flip side, we are also seeing sellers ask PE funds about their current  ESG position. Considering the amount of buy-side competition in the market, sellers may be faced with multiple offers, and ESG positions may be a differentiator. PE is taking notice of the ESG conversation, and operating companies need to be aware investors are beginning to make ESG  part of their due diligence process, whether that be at the platform level or at the bolt-on level.

PE investors are aware that the Biden administration has proposed changes to the federal tax code, including taxing capital gains for wealthier taxpayers at ordinary rates. This may provide more incentive to pursue and close deals in 2021 if changes to the capital gains tax rate are not made retroactive.