Smaller Private Equity Firms Face Larger Struggles in the Wake of COVID

Published April 29, 2021

Despite the pandemic, the outlook is strong for private equity (PE) firms globally. Deloitte reports, “Our base case scenario (55 percent likelihood) forecasts global PE assets under management (AUM) to reach US$5.8 trillion by 2025.”

Despite the positive outlook, the PE industry is trying to figure out deeply the pandemic has hit them. For the past year, many smaller firms especially have shifted into survival mode, and in order to survive, they have to understand the impact the pandemic has had and how they can get back to where they were.

As always, the most successful organizations are the ones that come back stronger than they were before. COVID provided unique circumstances for these small PE firms, some of which they’ll be recovering from for years to come. However, it’s not impossible for these firms to take what they’ve learned, shift where needed, and continue building a strong and successful firm that matches the outlook from Deloitte. 

In an effort to understand the impact of the Coronavirus pandemic on PE firms, Comhar Partners surveyed the owners of firms of varying sizes across the United States. Their findings reflect an industry divided, with small PE firms struggling to bounce back with the same resiliency as their larger counterparts. Here are five takeaways from the data.  

Smaller PE Firms Have the Lowest Confidence in the Industry

When asked to reflect on the state of the private equity industry, smaller PE owners and managers reported lower confidence levels than their medium and large counterparts. Only 11 percent of small PE firms were confident in the industry’s health in the wake of the pandemic, compared to 17 percent of larger companies. Two-thirds of small firms (67 percent) said they were affected significantly by COVID-19, compared to 59 percent of larger companies. 

This data should serve as a warning for industry analysts: the larger firms see themselves as better able to rebuild, but their size could overshadow the pain points of smaller companies.  

Social Distancing Hurts Smaller Firms More Than Larger Firms

Certain pandemic restrictions impacted private equity firms more than others. One of the biggest hits to fundraising opportunities and client relationship management was social distancing, with 44 percent of small firms citing this protective measure as a source of pain compared to just 33 percent of larger ones. 

These smaller firms feel pressured to compete for acquisitions and to generate leads for mergers more than their larger counterparts. This means a lack of facetime for networking and selling has left them without a strong client pipeline. 

This data highlights a harrowing residual effect of the pandemic. Small firms need to rebuild their lead funnel and network to their pre-pandemic levels, and that takes time.

Small PE Firms Prioritize Agility and Urgency in Their Clients

The impact of the pandemic will extend beyond marketing and lead funnels and affect how teams are chosen and shifted when firms purchase a new company. When asked about the CFOs of the portfolio companies they work with, smaller firms reportedly wanted to work with leaders who have high levels of urgency, adaptability, and initiative under shifting priorities. 

Almost all (95 percent) of small firms valued these traits compared to 86 percent of medium to large ones. While these traits have always been important, in the ever-changing landscape of COVID, this is even more important, especially for smaller firms who have more to lose with the wrong CFO in place.

Leadership Plays a Major Role in Portfolio Prospecting

The desire to work with agile CFOs ties into the values of small PE firms. Smaller companies value strong leadership teams more so than larger firms (89 percent versus 83 percent). This aspect, along with low operational costs, was the top priority for small firms, while larger firms focused more on liquidity and digitalization. 

Portfolio management has always required strong professional relationships, regardless of advances in technology. As such, this data highlights how the core values of small firms have become even stronger in the face of a global pandemic.

Smaller Firms Are More Likely to Have a Broad Industry Focus

When asked about the types of clients private equity firms work with, smaller firms reported having a broader industry focus than larger ones. In fact, 72 percent of small firms agree that they have a broad focus compared to 63 percent of medium and large ones. 

While industry focus won’t necessarily reflect the health of a PE firm, it does highlight how sweeping the pandemic has been across the global economy. Even firms with diverse portfolios and varying clientele have felt the squeeze of COVID.

What Does the Future of Small Private Equity Firms Look Like?

The pandemic hit hard—there’s no doubt about that. However, there are a few conclusions that can be drawn from our Comhar Partners survey data. Most importantly, the state of the PE industry cannot be painted with a broad brush. 

Small firms have different challenges and priorities than larger firms, but this doesn’t mean they won’t come back stronger than before. In fact, we can assume that because these smaller firms value lower operating costs and a stronger leadership team that they will, in fact, recover sooner than later. This is especially true if they invest in areas like executive recruiting to ensure they have an unshakable leadership foundation to build from.

Ultimately, if small firms can continue to understand their strengths, rebuild processes like lead funneling, and maintain an unwavering commitment to clients, they will be poised to excel in our post-COVID world. 

Bernard Layton has over 27 years of mid-level and senior-level executive search experience within the Industrial, Engineering, Construction, Business Services, Consumer Products, Professional Services and Financial Services industries. Prior to founding Comhar Partners, he built and lead the Chicago office of Stanton Chase since 2008. Previously, Bernard operated his own search practice (Peoplenext, Nicholas Partners) for over 15 years, assisting both U.S. and multi-national clients with their senior management needs.

Paul Herrerias has over 30 years of executive search and leadership consulting service in the Bay Area. He has conducted hundreds of search assignments in the professional and financial services, consumer products, technology, and wine industries. Prior to becoming Managing Director of Comhar Partners’ San Francisco office, he ran the Stanton Chase San Francisco office for 13 years and co-founded three additional executive search and organization development consulting firms.

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