The deals-led recovery: Why we really are all in this together

Ken Walsh Head of Deals, PwC United Kingdom February 2021

Many strands of evidence converge to support the theory that the corporate recovery from COVID-19 will be deals-led, not least the regularly-quoted statistic that there is $2.6trn of private capital available to invest[1]. But let’s step back for a moment and think more carefully about the drivers for this deals-led recovery - starting with the reasons for this dry powder.

The pandemic has had unfortunate far-reaching consequences for many businesses. It has forced some businesses to close, evaporating revenue overnight in many sectors, notably hospitality and leisure. One of the many roles of government has been to sustain employment, responding with stimulus and support packages, temporarily shoring up struggling businesses and maintaining employment. At 31 December 2020, there were approximately 3.8m jobs furloughed in the UK alone[2].

These necessary stimulus measures have resulted in an acceleration of Quantitative Easing (QE). UK Government 10yr-50yr bond yields have fallen from 4.6% (Sep-08) to 0.5% (Dec-20)[3]. These lower yields are also evident in the corporate bond market. UK corporate investment grade yields are on average down 3.5ppts from 2010 levels (AAA-A av. 0.7%, Dec-20), and high yield bond average down by 4.3ppt (B-BBB av. 4.8%, Dec-20)[4].

Whilst some fear the return of inflation in a post pandemic recovery, the scale of government intervention we have seen sends the strongest possible message that yields are unlikely to rise any time soon. We are likely entering a lower for longer yield environment. The result is an increasing pool of capital seeking investment, with those holding it having the aim of deploying their cash wherever the yield is greatest.

Over the last 12 months, we have seen growth in public markets indices. The Dow Jones Industrial Average, NASDAQ Composite, S&P 500 are at near all-time highs. Private equity houses, holding record levels of dry powder, are ready to deploy capital. In particular they are seeking resilient, reliable and free cash flow generative businesses which have weathered the last 12 months well or those that are well-placed to adapt to the accelerated changes arising from the pandemic. For example, technology or subscription focused businesses are attracting higher multiples. Many corporates also fared better than expected during the pandemic. They are benefiting from lower borrowing costs and with stronger balance sheets than a year ago. They now face a choice in how to use their cash reserves, whether that is repayment of cheap debt, or strategically investing this capital in enhancing organic growth or in opportunistic, market share driven acquisitions that will strengthen the business going forward.

So far, so economically straightforward given the exceptional circumstances. But we shouldn’t underestimate the impact of the pandemic in accelerating shifts in the deals environment. For example, the stakeholder community is now much wider, and holds more power than it did before.

The scale of government support provided over the past year has been, to use an overused word, unprecedented. The overall effect is that governments have more skin in the game and won’t be neutral observers. Any deals in the coming years that result in workforce layoffs, closures of businesses that are critical to a local community, or which fail to recognise wider societal impacts are likely to attract more scrutiny from governments, regulators, the media and the public.

The ESG agenda was already simmering away before COVID-19; it’s now very much front and centre with corporates showing more empathy, and those with a clear, metric driven plan, doing better. No greenwash or empty commitments will be readily overlooked. Blackrock warned at the end of January that it would consider dropping, from its actively managed funds, any companies that fail to commit to a 2050 net zero emissions target. Actions that fail to meet the ambition to, as the OECD put it, ‘build back better’ will face consequences.

Ken Walsh, Head of Deals

Ken Walsh

So what does this mean?

  • With so much cash looking for a good home, multiples are likely to be a little too high for comfort. Returns will be squeezed. Simple financial engineering will not be enough and that means that a laser-like focus on value creation is essential.
  • The financial outcome is only part of the story. Unless dealmakers address environmental and societal issues, there will be clear consequences: exit multiples may be diluted, the valuation of the company may be impacted, and access to capital may be restricted.
  • More so than pre-pandemic, there is an opportunity now for government, private capital providers and corporates to align their objectives for the future whilst at the same time repairing structural damage to parts of the economy such as hospitality and leisure.

I have no doubt that deals can lead us towards a better recovery if dealmakers are sensitive to this new world. We are truly all in this together.


[1] Source from Pitchbook - Private Capital overhang - 31 March 2020
[2] Coronavirus Job Retention Scheme statistics: January 2021
[3] Datastream from Refinitiv: UK Government bond rates source
[4] Datastream from Refinitiv: High Yield Bonds & Investment Grade Bonds, UK

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Ken Walsh

Ken Walsh

Head of Deals, PwC United Kingdom

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