2 minute read
HarbourVest
CRAIG MACDONALD
MANAGING DIRECTOR, HARBOURVEST
2021 was a year of considerable activity, particularly in the tech and healthcare sectors, as investors sought resilient assets which were well-placed to weather, and even grow in, the pandemic environment.
However, in line with the broader global recovery, other sectors such as industrials and consumer are starting to spring back, and activity across sectors is gradually balancing out.
We have seen a meaningful increase in consumer deal flow, with growth in consumer discretionary being particularly strong. For example, consumer discretionary deal flow is up around 70 per cent in absolute terms in 2021 compared to 2020, and consumer staple deal flow is up 50 per cent in absolute terms over the same period.
We continue to see growth across consumer in 2022, but consumer discretionary is growing slightly faster than consumer staples. We think this reflects sentiment that while the pandemic remains, consumers and the wider economy are learning to live with it.
As we move out of the pandemic, it will be important to build a diverse portfolio which is protected against downside risk, while also being able to capitalise on opportunities as the economy recovers across all sectors.
The American economist Harry Markowitz once said: “Diversification is the only free lunch in investing.” Private equity’s approach to diversification has been in evidence ever since the global financial crisis (GFC). Pre-pandemic, the trend towards increasing exposure to technology and healthcare was already apparent. This was then accelerated further by the pandemic, as both sectors were positioned to benefit from changes in trends such as remote work. However, the increase in exposure is modest within funds which are meant to be sector agnostic.
It is worth noting that tech and growth-focused funds have increased in number and size, and many cross-sector managers have been able to increase their exposure to growth by providing LPs and prospects with tech-focused funds.
Despite the general trend of recovery, companies will still face challenges in 2022, particularly around inflation and supply chains.
Private equity as an ownership model is well placed to handle inflationary pressures, but we need to keep a careful eye on the pricing environment. Supply chain issues are also prevalent, especially given the pace and scale of recent disruptions – resolving these will be a key priority for the year ahead.
Looking ahead, investors will need to be particularly focused on their partnerships. For GPs, this will be crucial. Industry expertise and moving to address these challenges quickly will be a competitive advantage.
Superior managers’ abilities to differentiate themselves from both public and private benchmarks against the backdrop of a potential downturn in markets is key and investors will want to be as selective as possible in their GP relationships. This has always been the case but will gain renewed focus as we move into 2022.
