What opportunities exist for institutional investors in private equity primary market?

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Business, Technology, Internet and network concept. Young businessman working on a virtual screen of the future and sees the inscription: Private equity © Marina Putilova /123RF Stock PhotosMany asset classes, including private equity, have been hammered by the coronavirus fallout, but opportunities still exist in the primary middle market for a variety of structural reasons, according to a new report by Capital Dynamics.

Specifically, it noted that primary private equity fund managers deploy capital over three to five years, which avoids the risk of deploying all capital at the peak of a cycle. And transactions slowed in 2019 with general partners cautious about the high-priced environment, so they now have the dry powder available to take advantage of opportunities.

Further, GPs have proven to be good sellers, said the report, and active ownership and capital support allow private equity investments to be more resilient in downturns, which can lead to more attractive post-crisis exit positions. “Investment activity during the first half of 2020 indicates private equity managers continued deal-making despite headwinds. Add-on acquisitions are proliferating as GPs position existing portfolio companies to gain increased market share.”

The report specifically highlighted the opportunities in the middle market. “Mid-market companies were engines of economic growth during recoveries following past downturns and delivered outsized returns for private equity investors. This crisis and the years ahead could be particularly attractive as mid-market investors can capitalize the most during market dislocations.”

The middle market has a broad target universe, it noted, and capital markets are less important because of the lower levels of leverage required to execute deals compared to transactions in the larger end of the market.

“A new economic cycle of recession and recovery is underway, which will lead to market dislocations and differentiated investment opportunities over the near to medium term. Managers looking for opportunities to invest in the current market can — and according to our market observations — already are taking advantage of decreased valuations, attractively priced add-ons and increased investment opportunities.”

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