The Covid Effect
Message from Scott Hendon, Head of Global Private Equity team
Private equity houses are still sitting on more than $1.5 trillion of dry powder as of the end of 2019, and nothing has changed there—yet. So compared to a world where liquidity is going to run in short supply and governments are stepping in to pay wages, PE funds are in the enviable position of having significant amounts of cash to deploy.
But their portfolio companies will be put severely to the test as new opportunities are likely to dry up, availability of debt is already tightening and fundraising will be more difficult. Furthermore, if deployment drops away, LPs might get nervous and ask for their money back. This last piece would be disastrous for any PE house.
However, it’s not all doom and gloom. Once the portfolio companies have been shored up, having lots of capital in this environment will enable firms to take advantage of opportunities that may not have been present before. As one investor remarked, “Good businesses going into this crisis will still be good businesses coming out”. Therefore, for PE houses that can free themselves from weaker portfolio companies, have a broad remit, and have the flexibility and the skills to provide support, there will be opportunities to deploy capital sensibly. Furthermore, pricing is likely to be cheaper.
In the short term, BDO can assist companies in the PE ecosystem by:
- Analysing their current position, mechanisms and plans
- Developing resilient business models
- Assessing future opportunities. For example, what opportunities are there to make bolt-on or tuck-in acquisitions?
- For current processes / WIP:
- Evaluating whether deals need to be restructured to de-risk (pricing, minority, vendor financing etc.)
- Assessing the extent to which the availability of debt will affect funding
- Identifying where might they be. For example, are there distressed assets to be acquired which could add value to the portfolio?
- Determining how they can be accessed
- Structuring for flexibility (minority investments, restructuring, equity underwriting etc.)
In the longer term BDO can assist with:
- Planning and structuring if the economy is thrown into recession. What does that mean for the PE house strategy?
- Advising on the investing the rest of the fund, including safe havens, conducting greater/different due diligence, sitting and waiting vs investing through the cycle
- Identifying what skills will need to be enhanced or developed
- If there’s a slowdown in M&A activity:
- Assessing the reduced volume of transactions
- Advising on pricing
- Evaluating how PE houses can succeed if their management fees are reduced
- Advising on how to position yourself as attractive to PE investors