Five Things to Look Out for in the Private Capital Markets in 2021

2020, what a year! It came in like a lamb and out like the most ferocious lion any of us could have imagined. The private debt and equity financing markets remained busy, particularly in Q4’20, as investors looked beyond the pandemic to attempt to pick the companies that would thrive, in spite of, or because of, the new world in which we find ourselves. With that said, here is what’s on our radar for 2021.

As banks focus inward, alternative lenders look outward.

Last year saw commercial banks highly focused on managing their portfolios versus booking new business. There was a lot of work to do between monitoring pandemic-stricken assets, administering PPP loans, and trying to make sense of the Main Street lending programs. In the meantime, non-bank lenders got aggressive, ending 2020 at or above pre-COVID levels in terms of leverage and at or below pre-COVID levels in terms of interest rates. We expect this trend to continue in 2021 as alternative lenders, for the most part, exited 2020 unscathed by the pandemic and continue to hunt for quality private equity (PE) backed and non-sponsored companies to support. At the same time, banks are entering this year with a new round of PPP to deal with and a general “risk off” attitude towards new business.

The rise of the family office as a direct lender.

It has been well-documented, including in my CSQ article “It’s a Family Affair” that the family office has long been emerging as a PE alternative acquirer and investor in middle-market companies. However, a somewhat new and growing trend is the family office as a provider of debt and structured capital. This is a natural progression that mirrors what we have seen in the PE world – groups that have already deployed massive amounts of capital into equity strategies with incremental wealth seeking yields in the high single- to low-double-digits. We expect family offices to compete largely with more traditional direct lenders like BDCs and SBICs this year.

Lenders [finally] understanding the whole eCommerce thing.

Historically, we have seen lenders, banks and non-banks alike, struggle with borrowers with heavy Amazon concentration or even just sizeable direct-to-consumer presence on their own Websites, as these business models limit beloved lender assets like accounts receivable and call to question a company’s brand strength versus just an ability to drive traffic through paid search and social marketing. 2021 might be the year where we no longer have to answer the question: “Why won’t Amazon just knock off this product themselves?” as lenders become more sophisticated and are able to recognize Amazon, Shopify, and Facebook as the platforms and tools they are, rather than existential risks.

Better for you + better for Earth = better investor interest.

Last year there were too many capital raise deals in wellness to count. From plant-based milk (Oatly) and meat (Impossible Foods) to digital meditation (Headspace, Calm and Moshi), not to mention all the fitness-related transactions, investors flocked to companies solving the challenges of physical, mental, and terrestrial health. With the new Biden Administration in place firmly focused on the environment and healthcare, 2021 should find no shortage of deals addressing the sustainability of our bodies and our planet.

Remote everything is not going away with a vaccine.

While many of us are clamoring to get back to our offices and real-life socialization, the pandemic has taught us that there are a lot of efficiencies to gain by keeping some things remote. We saw that firsthand with our client, Inception Digital, a fast-growing virtual engagement platform for the life sciences industry that raised both a structured growth financing and significant PE investment this year. It would be hard to imagine that, once we are back to “normal”, people do not still want to avoid that two-hour drive or five-hour flight so they can spend more time with family, so this year should find investors continuing to seek best-in-breed technology-enabled business that allow people to get together while apart.

I continue to be inspired by the resilience, compassion, and ingenuity of the entrepreneurs, investors, and advisors I work with every day and look forward to a safe and successful 2021 for our deal community.