How are private equity firms reacting to the Corona Virus crisis?

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Private Equity

The relentless progress of the corona virus is pummeling life and business in the UK in a way that hasn’t been seen since World War two. The health of the nation has been shifted to the center of importance, with UK businesses effectively put in lockdown to tackle the spread and save lives.

To find out how different sectors are being impacted and reacting to the spread of the disease, BLM is talking with sector leaders across retail, construction, tech and others.

For this article, we look at the private equity market is reacting to the crisis.

How is the PE market reacting to the crisis?

Leigh Webb – finnCap Group plc

The overriding view of many people in private equity is that there is a need for PE funds to fully focus on supporting their portfolio companies and their incumbent management teams. Every firm is looking closely at how well capitalised their portfolio companies are, including carrying out stress testing to assess what the impact might be after say three or six months, if the situation does deteriorate further.

Some PE funds are also doing scenario planning to plan for the possibility of broken supply chains or companies facing other operational difficulties.

However, I’m sure that in the medium term most PE funds, given the amount of dry powder they have at their disposal, will consider committing capital if and when the right opportunities present themselves.

The Government has announced a raft of measures to support growth businesses and PE funds could also have a strong role to play here alongside Government helping businesses with the support they need to survive this very difficult time.

Asma Bashir – Centuro Global 

Having been involved in the world of investments including Private Equity “(PE)” and Venture Capital “(VC)” for the last few years I am seeing a very mixed impact on this industry group as a result of the coronavirus.

Given the mass disruption to all businesses globally, particularly amid social distancing measures, PE and VC firms have had to move fast to ensure the continuity of all critical processes.

They have had to quickly get up to speed with the various video-conferencing tools and receive more regular updates from portfolio companies. It has been fundamental to not only assess how they continue to run their own firms, but also look to step in to assist the portfolio companies, adding volumes of work.

Matthew Connor – Calculus Capital

We are still seeing new opportunities and continue to pursue opportunities. We are in the later stages of due diligence with a virtual reality gaming company which has seen a 20% uptick in sales recently as result of the lockdown.

Generally, problems for companies will be in sales, supply chain disruption and, where relevant, in installation and fulfilment. It’s a national and a global challenge, and certainly something we will look at closely before making an investment.

In terms of our existing portfolio we are working with companies on their strategies to manage cash and adapt to a changing operating environment and have a panel of professionals able to provide advice and implement support.

How are PE funds being affected?

Leigh Webb

Going into January, the mood in private equity was extremely buoyant. Political and wider uncertainty has eased off significantly following the General Election, and the Brexit issue was largely settled.

PE funds were looking forward to a promising nine months before the UK’s final departure from the EU, which would likely have seen significant deal flow.

This optimism has now dissipated for the time being, although it must be said that the private equity industry is very resilient, and any concerns will be short-lived. Over the last month the industry has been a taking stock of where we are, and as a result many PE funds are looking at the longer term.

This means pausing, focusing on the assets they already hold and making sure they are in as strong a position as possible before beginning to assess new opportunities.

Is more of the investment now turning to companies that have liquidity problems – travel, restaurants etc?

Leigh Webb

This is possible, but I think it will likely fall to turnaround funders who are specialists, who will be attracted by the prospect of historically high caliber assets becoming available at an attractive price because of the economic situation we find ourselves in.

These funders will of course be best placed to capitalise on distressed assets and will play a key role in rebuilding businesses, which will in turn help the wider UK economy to recover.

Matthew Connor

The majority of Calculus’ portfolio is not in “as risk” sectors. Calculus’ portfolio mainly consists of software and healthcare businesses. Where possible, these businesses have moved to remote working to minimise interruption, and to continue to offer their services.

Nonetheless, sales may decrease meaning the cash management practices are important. Each company is also taking this as an opportunity to strengthen relationships with their customers – seeing if they can tweak their offering to better suit the customer during these trying times.

It is also important to note that this unprecedented situation is also creating opportunities for portfolio companies. For example, one investee company has been given £1m UK Aid to develop a rapid diagnostics test for coronavirus.

What other trends are you seeing in the market?

Leigh Webb

I think we will still see deals being completed in the coming weeks and months. However, these will be deals that were already approaching the final stages pre-coronavirus, such as those where perhaps site visits and management meetings had already taken place, and with due diligence well underway.

Transactions will take longer than previously anticipated, but I’m sure we’ll see some announcements, and the market will certainly bounce back once we have clarity on the likely timescales of this unfortunate global pandemic.

Matthew Connor

We are seeing a number of our diagnostic focused portfolio companies pivot their expertise towards helping in the fight against coronavirus, including Mologic, who received a visit from Boris Johnson in early March, as they have been awarded a grant to develop a rapid test for the disease.

Genedrive has focused part of its core resources towards development of two SARS-COV-2 tests, which can determine whether someone is infected with coronavirus. Finally, Yourgene Health signed a manufacturing agreement with diagnostic group Novacyt to make tests for the virus, with the first batches to be shipped from the Manchester site in the next few weeks.

Asma Bashir 

Depending on the industries each PE firm operates within, there have also been different levels of impact. For critically important sectors such as healthcare and food retail which are at the frontline of battling the virus, demands have increased and the main challenge has been around maintaining the supply chain. On the other hand, the hospitality, leisure and tourism sectors have taken a massive hit.

I am currently working with a number of tech companies who are making fantastic differences in healthcare and also a handful of food distribution services, who have benefited from stay at home measures. Leaders in the PE and VCspaces need to think carefully about how time and resources are allocated to the various portfolio companies to ensure maximum potential gains and accepting losses that are less recoverable.

The current changes in this landscape require agility and flexibility. Whilst many companies are being detrimentally affected, there will be a number that blossom and thrive. Given the market displacement and falling valuations, there are actually a number of opportunities for PE firms but the challenge will be undertaking due diligence which often requires physical meetings and visiting premises such as at the retail outlet or factories themselves.

PE and VC firms have withered big macro events like this previously such as the financial crisis in 2008 and have found their way through such turbulences. We will see a slowdown in investment activity even though there is an appetite to invest and some of the difficulties include company valuations.

How do you assess the value of a company seriously affected by COVID19 compared to a company that is thriving at present. I think the key therefore is a careful balance between short term revenue and delivery risks and longer term risks and opportunities.

There is more to follow with this article and we also recently spoke with devere group who said that investors are still seeking opportunities – here

And to find out more about how listed markets are reacting go here

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