Private equity and its role in Britain’s economic recovery

The relentless progress of the coronavirus is pummelling 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, Business Leader talked with sector leaders across retail, construction, tech and others.

In this article, we look at how the private equity (PE) market is reacting to the crisis.

How is the private equity 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.”

Asma Bashir – Centuro Global: “Having been involved in the world of investments, including Private Equity 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.”

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 (at the time of writing). 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.”

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 “at 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.”

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 VC spaces 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.”