Updated: Jul 29, 2020
While the COVID-19 situation is quickly changing, we’ve noted some of the most common and persistent issues that are invading the Private Equity market right now and what PE leaders are doing to weather the storm.
The force of the coronavirus (COVID-19) outbreak is powerful enough to disrupt most businesses across the globe. Companies who were previously standing on stable, predictable ground are now confronting a whirlwind of uncertainty and economic hardship. This storm is changing on a daily basis, and it’s difficult to truly predict the aftermath of shock and damage left behind in the wake of COVID-19. Despite our state of uncertainty, Private Equity firms are stepping up to contend with the crisis, coordinating and managing next steps for their portfolio companies.
At a glance, the impact of COVID is forcing PE to face a number of critical challenges and recalibrate their growth strategies to minimize risk and stabilize existing portfolio companies. Deal teams are shifting their priorities to analyze new opportunities and prepare for the expected downturn. The effect of this shift into triage mode means that investments will slow as buyers focus their attention to keeping their portfolio companies resilient and secure. Sellers, on the other hand, will be wary about the drop in equity values. However, unlike in previous economic crises, PE funds are holding onto a record-breaking amount of dry powder—an estimated $2.5 trillion—to invest in deals. Although these conditions are impacting transactions, PE firms have seen multiple years of successful dealmaking, giving the industry the confidence it needs to stay steady through the downturn.
Amidst even the most unprecedented conditions, the private equity industry is weathering the storm and protecting their portfolio companies by following these key steps:
First Priority? Your Portfolio Company
Funds are quickly trying to tackle this crisis by preparing their portfolio companies for whatever lies ahead. For most businesses, this means creating effective management teams, modeling crisis scenarios, and diversifying revenue streams. With anticipated longer holding periods, firms must optimize cost structures and working capital, identify short-term and long-term cash flow needs, assess supply chains, and collaborate to support people, facilities, and operations. Perhaps the most important step forward for portfolio companies is to adapt to new operating environments, and this means refreshing your strategy to fit the current state of business dynamics.
Withstand Whatever Comes your Way with a Strong Defense
Business continuity planning has always been an important step for any business to take, but COVID-19 has swept up unparalleled situations that companies are unequipped to deal with. Due to the immediate and widespread shift to a remote workforce, for example, businesses are facing an influx of threats and are more susceptible to social engineering attempts. In order to protect portfolio companies in the long-term, businesses must prioritize cybersecurity and crisis response. Business continuity planning should begin with a clear response structure and communication plan for portfolio companies and lead to total endpoint protection. Have your security leaders update scenario plans, review cyber-readiness, conduct phishing exercising, and strengthen your security tools before threats happen.
Prepare for Right Now and the Future
To preserve liquidity, reduce costs, and prepare for an extended downturn, PE leaders should have a custom playbook that not only adapts to the effects of the pandemic on portfolio companies, but also produces proactive solutions and cash flow forecasts to track the liquidity needs of each company. Modeling a range of scenarios in your risk strategy will be crucial moving forward so that you’re equipped to handle the foreseeable and unpredictable.
Adapt Quickly to the New Rules and Guidelines
PE firms need to understand all of the new deadlines and regulations that are coming their way in the wake of COVID-19. Business disruption could cause potential setbacks and losses, requiring strict financial monitoring and ongoing compliance. No matter the situation, it is critical that PE firms continue to review regulatory environments, maintain compliance and filing deadlines, review legal responsibilities, create plans to overcome operating losses, and track capabilities.
Take Advantage of Opportunity
It’s more likely than not that there will be a gradual resumption of activity and transactions in the PE market, especially since our financial system is more resilient than ever before. Not to mention, PE firms are standing on an enormous pile of dry powder, helping them make purpose-driven decisions and propelling them beyond the crisis. Firms that are mobilizing management and making smart decisions around their portfolio companies will have the most control, no matter how stormy it gets.
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