Private Equity and Value Creation in the Pandemic‑Era Economy

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The new business environment brought on by the pandemic has forced companies to rethink how they operate, including working remotely and dealing with sometimes dramatic changes in supply and demand for products, services, and people.

Private equity firms experienced these challenges both internally and among their portfolio companies. Many quickly adapted to the remote operating model and found ways to connect with new and existing companies to take advantage of the economic revival since the start of the pandemic.

The results are evident with a surge in investment in recent quarters: According to the latest CVCA data, VC investment hit record levels for the first nine months of 2021, or $11.8B, well above the annual VC investment of $6.2B for 2019. Investment rounds are also larger and the number of megadeals has increased.

Investment in Canada’s startups has never been stronger,” CVCA CEO Kim Furlong stated in a recent release, adding the crop up of new continuation funds, while the average growth-stage investment is also rising. We are seeing a willingness to hold with investors as they stay the course in their investments – a testament to the maturing Canadian venture ecosystem.”

While businesses have faced numerous challenges since the pandemic began, management teams and their employees have hunkered down and worked together to push through. 

Nina Larsen, Director of Strategic Initiatives at OMERS Private Equity, says working remotely was a big transition for her team and its portfolio companies at first, but everyone adapted relatively quickly.

I think that’s largely because, as a global team, we weren’t really doing anything drastically different than we were before the pandemic,” she says of OMERS Private Equity, which has about 20 portfolio companies across four sectors: healthcare, industrial, business services, and software/​technology.

We have a strong culture that’s built on trust and communication and that allowed us to transition to a remote environment rather seamlessly,” she says.

And while remote work may seem less personal, Larsen says regular video meetings gave the team a chance to get to know each other a little better.

Just seeing the insides of each other’s homes and having a bit more of a window into each other’s lives was a positive experience,” she says. Nothing beats face-to-face interaction – and relationships are critical to the private equity investment process – but there were some good things that came out of the remote working experience.”

OMERS also started to host virtual executive roundtables for its portfolio company C‑suite executives to connect and share ideas, which she says has been very valuable in keeping the community connected and something they plan to continue even in the new hybrid working era.

The connections were also invaluable as the economy began to pick up in the latter half of last year and has continued throughout 2021, which benefitted people and companies in the PE ecosystem.

I think there’s an incredible opportunity for growth right now,” Larsen says. There’s a big economic rebound that’s taking place and a lot of post-COVID-19 optimism.”

Larsen says many of their companies are on track to have a phenomenal year” in 2021, despite supply chain issues that have hampered economic activity.

It’s a great time to own companies that are growing, that are resilient,” she says. It’s also a good time to potentially exit good businesses as well.”

For instance, earlier this year, OMERS Private Equity announced its investment in Gastro Health, a national, leading U.S. platform supporting medical groups specializing in the treatment of gastrointestinal disorders, nutrition, and digestive health. The deal fits with OMERS Private Equity’s success of partnering with top management teams at industry-leading companies and is part of its focus on the healthcare sector.

OMERS Private Equity also announced in May that it would sell its majority stake of Environmental Resources Management, which it purchased alongside AIMCo in 2015.

The private equity market has been very active since the start of this year; it’s more active than I think it’s ever been,” Larsen says, adding that OMERS Private Equity continues to evaluate numerous opportunities while maintaining its long-term investment outlook.

The PE team is also navigating inflation and supply chain issues that have hampered economic activity in some sectors. We’re working closely with our portfolio companies to mitigate the impact,” she says, including providing them with the right expertise and resources to help manage bottlenecks and rising costs.

Her firm’s focus on investing in strong management teams has also proven wise amid the pandemic and through different operational challenges.

Our portfolio company management teams really have really stepped up and led throughout the crisis, especially in the early days, where there was so much uncertainty,” she says.

OMERS Private Equity has also boosted its own management team, hiring specialists in areas such as debt capital markets as well as building its team of operating advisors in areas such as technology.

These are team members who help us deliver more value when we work with our portfolio companies,” Larsen says.

Peloton Capital has been active during the pandemic, adding three companies to its portfolio in the past 18 months, for a total of five investments as of mid-November 2021.

The newer investments include global governance services firm Glass Lewis, The Fertility Partners network of North American fertility clinics and Edgewood Health Network Canada, a national provider of mental health and addiction services.

Prior to the pandemic, Peloton Capital had invested in P3 Veterinary Partners, which turned out to be a good move given the rapid growth in pet households since early 2020, and 123Dentist, a majority dentist-owned company with practices across the country.

We’ve done more deals during COVID than before,” Peloton Capital managing partner Steve Faraone points out, which is a testament to the active market. 

He says the firm’s investment strategy hasn’t changed since it was founded in 2018, with a focus on companies that provide recurring non-discretionary service revenue.

Faraone believes the recent boost in PE activity is driven by the economic comeback, as well as some business owners re-evaluating their personal and professional priorities amid the pandemic.

Some people are saying, maybe I’ll retire, find a different career or do something different,” he says.

On the flip side, many business owners are looking to expand, having survived the worst of the pandemic or having benefited from changing consumer tastes and behaviour – including the dramatic shift to digital services – and are turning to PE for support.

Valuations of many of these successful companies have also soared, which is good for sellers but more challenging for buyers.

Valuation levels are as high as I’ve ever seen in my career for private businesses,” notes Faraone, who is a former managing director at the Ontario Teachers’ Pension Plan. You’re seeing a lot of demand for attractive businesses and a lot of capital in the system.”

He says this new environment, including the increased interest in Canadian startups, puts added pressure on PE firms to help their portfolio companies grow.

He says PE firms need to ask hard questions for themselves such as: What capabilities and people are you bringing to help that management team or that founder to really continue to grow and build successfully?”

For Peloton Capital, Faraone says it means more thought about building and developing value creation capabilities to help them be successful. It’s something he says startups looking for PE support will also be looking for in the future.

For companies picking a private equity firm to partner with, money is plentiful, so it’s really about what experience and capabilities does this firm bring to the table?” he says.