Alternative Investment Professionals Predict That Full Deal Activity Will Return in 2021

Tech and health care/life sciences sectors are best poised for growth, according to EisnerAmper survey

A new survey of more than 250 alternative investment professionals finds that a strong majority expect a return to pre-pandemic levels of deal activity by the close of 2021. The survey, conducted during EisnerAmper’s Virtual 5th Annual Alternative Investment Summit, shows that 74% of industry professionals predict a return to pre-COVID-19 deal activity by the end of Q4 2021. Two in five (41%) respondents predicted an even swifter recovery, with a return to pre-pandemic deal activity by the end of Q2 2021.

When asked to identify the industries that present the best chance for growth in Q4 2020, respondents pegged technology and health care/life sciences as the sectors with the greatest opportunities. This largely mirrored results from EisnerAmper’s 2019 survey, when technology, cannabis, and health care/life sciences were named as the strongest growth sectors.

EisnerAmper’s survey also identified the major trends that will impact how the alternatives sector operates moving forward. Many dealmakers hit the pause button in March 2020 when COVID-19 caused a global economic crisis and dramatically shifted the ways in which deals get done. Despite the investment industry continuing to largely operate in a work-from-home setting, 80% of private equity executives agree that they have been able to satisfactorily conduct deal due diligence during the pandemic. Executives even see potential for some elements of the virtual process to last beyond COVID-19, with 73% of respondents expecting a decrease in in-person site visits and management meetings post-pandemic.

“The alternative investment industry has remained resilient during a year that no one could have predicted and has adapted quickly and efficiently to the challenges that the global pandemic has posed,” said Peter Cogan, Managing Partner of EisnerAmper’s Financial Services Industry. “The survey findings unveil a fairly optimistic outlook, even as uncertainty lingers amid the upcoming presidential election and rising COVID-19 cases in some areas.”

Private equity and venture capital professionals seeking diversified deals; hiring continues

In a congested deal market, 32% of PE and VC professionals identified their top challenge as finding diversified deals to add to their portfolios. Fluctuations in U.S. trade policy and cybersecurity concerns were also cited as  top challenges for businesses in this sector by 21% and 19% of respondents, respectively.

Though hiring at many PE/VC firms halted in the early days of the pandemic, 56% of respondents stated that they do plan to hire over the next 12 months, with 76% of those adding to their operations teams and 52% adding to their investment teams.

“Plans to resume hiring in 2021 is a strong indication that the private equity industry is recovering from the disruption that the pandemic caused in the first half of the year,” said Cogan. “Furthermore, as private equity firms face the challenge of finding diversified deals, recruiting fresh talent is vital to help realize new opportunities.”

Hedge funds slow to adopt AI

EisnerAmper’s survey found that hedge funds are still slow to adopt artificial intelligence and machine learning to make investments or trades, with 87% of respondents stating that their hedge funds do not utilize these tools. When asked to name the top challenge for their business, hedge fund executives noted cybersecurity concerns (31%) followed by incorporating new technology (25%). Notably, fluctuations in international trade policy was only cited by 13% of respondents as their primary concern, down steeply from 40% last year when it was the leading issue.

Despite a slow uptake of technology, hedge funds are still thinking innovatively in today’s uncertain market to capture new opportunities and bring value to investors. Forty-three percent of hedge fund executives reported that they have considered launching a new product and/or fund utilizing a different strategy from their core strategy in the last six months, with an additional 14% reporting that they have launched such a product or strategy.

“The virtual environment has caused a dramatic shift in hedge funds’ top concerns and challenges from fluctuations in international trade policy last year to cybersecurity concerns this year,” said Cogan. “However, we’re also seeing the industry consider new opportunities stemming from the pandemic as executives think about launching new products and funds that may stand to benefit from market dislocation.”

Challenges for LPs

LPs have been a solid source of liquidity for fund managers in recent years, but a number of factors could threaten this status. When asked to name the issue that could most impact LP liquidity, 36% of alternative investment professionals cited a second wave of the COVID-19 pandemic that could prompt a second economic shutdown. Poor public market performance (23%), changes to tax regulations (21%), and the outcome of the presidential election (20%) were also named as major factors that could impact LP liquidity. Furthermore, the global pandemic has presented additional obstacles for LPs, with respondents citing compliance regulations as the top challenge for their industry, followed by scaling for growth and securing fund allocations.

As LPs opt to continue allocating to managers with whom they have relationships, 62% of respondents reported that they do not anticipate that LPs will make significant shifts in their investment allocations over the next 12 months. And with the alternative investment industry increasingly focusing on ESG strategies, more than two thirds of LPs consider it very important (26%) or somewhat important (41%) to invest capital in ESG-related funds and companies.

Featuring a keynote from Ellevest CEO and Co-Founder Sallie Krawcheck and a fireside chat with Donna Brazile and Karen Hughes, as well as speakers from Institutional Limited Partners Association, Angelo Gordon, Performance Equity Management, Corbin Capital and other leading alternatives firms, EisnerAmper’s Virtual 5th Annual Alternative Investment Summit took place on September 24, 2020. EisnerAmper’s survey incorporated feedback from 259 event attendees, which consisted of GPs, CFOs, COOs, CIOs, CAOs, controllers, portfolio managers and operations specialists from across the alternatives industry.