Private Equity & Debt Capital Markets Adjust to the New Normal

By: John Czapla | Justin Johnson

Estimated reading time: 3 minutes

The article in brief:

  • Public stock and bond markets seem to have quickly shaken off the global pandemic’s impact, but it has taken private securities markets a bit longer to adjust.
  • After spending much of the post-COVID period inwardly focused on the management of existing assets, private equity and credit market participants have capital to deploy and are pivoting to new deal M&A and related lending activities.
  • In private equity, lower multiples have newer vintage funds with fresh capital champing at the bit, even as they create challenges for older funds that are ready to harvest.
  • Private credit players are finding more opportunities and rebuilding their pipelines as many companies recover, and as private equity deal flow is beginning to ramp up. However, underwriting standards remain strict, and lending volumes are still below pre-COVID levels.
  • Hanging over private credit and private equity markets are the upcoming presidential election with potential material adverse changes in economic policy, notably around income taxes and carried interest, as well as the prospect of a severe second wave of the virus and a double-dip recession.

Even as public equities quickly shook off the dislocations caused by the COVID-19 pandemic (at 33 days, the stock bear market of 2020 was the shortest in modern history), private markets have been a little slower to adjust. Still, VRC’s John Czapla, whose practice focuses on helping private equity and debt funds value assets in their current portfolios, and Justin Johnson, who spends much of his time working with financial sponsors on new investments, both say their markets are returning to normal, though it’s a new normal.

For PE Sponsors, Fund Vintage, Portfolio Company Sectors Are Key

Funds that raised fresh capital late last year or early this year are in the cat-bird seat. Johnson says the pandemic didn’t stop fundraising—sponsors are still raising capital and closing funds, and those with fresh capital are expected to be active. They can call capital and take advantage of lower valuations, even as multiples have bounced back from the lows in the first half of the year.

The other side of the depressed multiples coin is older vintage funds, especially those five years or older that are in “harvest mode,” Johnson says. These funds are experiencing exits at lower valuations, especially if their portfolio companies are in COVID-impacted sectors such as retail, leisure, or public events, where cashflows are only beginning to come back, and there are overhang worries about new waves of COVID shutting down the economy again in the winter months.

Earlier this year, Johnson was skeptical of the prospects for initial public offering exits, but he says several clients have filed IPO registrations. Still, on the margin, he is seeing more sponsor-backed companies taking the M&A route—whether selling to strategics or, in a trend that was already well established even before the pandemic, by selling to other private equity players.

The pandemic is also shaping the ‘what’ and ‘how’ of private equity deals. The COVID-era environment, Johnson says, favors smaller, lower-risk deals, including rollups where the value is unlocked through basic operating synergies. Complex deals that rely more on strategic combinations of complementary business are relatively less appealing. Also, he added that the basic logistics of diligence means that deal activity in brick & mortar industries, where physical site visits are necessary, has slowed significantly, even as technology-related deals, where diligence can be done remotely, have continued apace.

In any case, private equity activity has picked up on the back of high levels of dry powder coupled with a rebound in company performance and the macroeconomic outlook.  Many are also motivated to squeeze in deals before a potential White House change and a shift in economic policies.

Johnson says the pandemic didn't stop fundraising—sponsors are still raising capital and closing funds, and those with fresh capital are expected to be active.

Private Equity and Debt Market 2020

For Private Credit, Q2 and Q3 Provided the Pause that Refreshes

As companies recover and private equity deal activity has gradually picked up, Czapla says the primary private debt market is following suit. With adequate dry powder and growing deal activity, he expects issuance to continue growing, barring a major resurgence of the virus. Since the onset of the pandemic in mid-February, private lenders spent much of their time focused on monitoring and, in some cases, providing solutions to troubled borrowers.

Lenders have been working constructively with borrowers, sponsors, and bank lenders to offer liquidity in terms of revolver, delayed draw commitments, and covenant relief to allow borrowers time to get their feet under them. This market tone suggests that all parties believe they are “in it together” to work through the pandemic’s unprecedented challenges. Consequently, by Q3 2020, many impacted companies experienced a material rebound in performance, and defaults were much lower than anybody expected.

But as private credit stabilizes, a new normal is setting in. Czapla says new private credit deal terms have been more lender friendly, with better credit document protections, lower leverage levels, tighter covenant cushions, and fewer EBITDA addbacks allowed. One of the biggest challenges for market participants continues to be recalibrating EBITDA forecasts to reflect the new reality.

New deals are being done at lower leverage levels than before the pandemic and still in “safer” industries that have been minimally or even positively impacted by the pandemic shutdowns. However, some deals with existing borrowers are underwritten using next-12-month or forward EBITDA levels; this may not fully reflect the worst three months of the COVID trough and, as such, don’t appear to fully factor in the likelihood of a second wave and possible double-dip recession.

Nevertheless, despite increased optimism and the material increase in deal volumes, the general tone of private credit markets is still one of vigilance. It is likely to remain so until the November election, and the pandemic is behind us.

Some deals with existing borrowers are underwritten using NTM or forward EBITDA levels may not fully reflect the worst three months of the COVID trough and, as such, don't appear to fully factor in the likelihood of a 2nd COVID wave or double-dip recession.


The new normal in private capital markets has fully set in and is generally defined by prudence and caution. However, it’s still a work in progress, with some industries less affected than others, and hence, not all are treated equally. Those industries not materially impacted or positively impacted by the pandemic have been the sole focus of the recent deal activity.

Conversely, those affected by the pandemic are going in the right direction, but are still deemed in recovery mode and deemed too risky for material private deal activity.

Time will tell when these industries see any material M&A and refinancing activity in the private markets. We guess that we will not be back to “normal” or pre-COVID deal volumes and terms until the pandemic is out of the headlines, which is anybody’s guess.