Industry experts: An interview with our Head of Private Equity
Mr Ost, the coronavirus has had an impact on almost all industries, albeit to varying degrees. How has it affected private equity firms?
Generally, it can be said that the more than 500 private equity firms (PEs) in Germany invest across all sectors of the economy. The impact of the Covid-19 pandemic is therefore varied.
In principle, PEs are impacted in all three of their core areas of activity:
How are private equity firms responding? What are they focusing on?
Without a doubt on portfolio management. Almost everyone in the sector has confirmed to me that the current focus of crisis management is primarily on their investments - PEs are even assigning staff to individual portfolio companies. We are providing our clients with intensive support on their portfolio management. This includes monitoring and optimising liquidity as well as applying for governmental aids such as short-time work, temporary tax reliefs and governmental guaranteed loans. Drawing on such funds at an early stage ensures the necessary headroom to work constructively on sustainable solutions.
Following this first stage of "react & protect", the situation has stabilised. Now it's a question of thinking ahead, which involves adapting business models and value chains. The perfect storm that we are currently experiencing has disclosed inherent weaknesses. PEs have drawn their own conclusions from this and already move on to optimisation.
With regards to transactions, the initial shock-induced paralysis appears to have been overcome. The crisis is increasingly being perceived as an opportunity which may give rise to numerous investment opportunities. This is all the more promising as business valuations are declining and corporates are temporarily not competing as bidders. However, for this to happen, financing options, including new capital commitments from investors, must return. Many private equity managers are currently in close communication with their investors, as a number of them have become increasingly protective over their investments.
Are we more likely to see an increase or a decrease in private equity activities?
PEs are currently expanding their list of potential purchases, the transaction pipeline. However, the potential sellers will of course not immediately adjust their price expectations. They are claiming: Why should my company be worth less now, although it was perfectly healthy before and is only suffering due to the temporary, government-mandated shutdown at the moment? For private equity transactions to increase, the valuation multiples - simply put, prices - first need to drop. However, companies in liquidity crunch will be less hesitant and may represent good investment opportunities for PEs. There is an increasing focus on "loan-to-own", that is, on loans that can be settled with shares if repayment is not possible.
Are there any structural changes emerging?
Yes, in many aspects:
What is giving you hope?
Private equity - in general - is a very optimistic industry that looks ahead in search of opportunities. We are confident that many firms have already overcome the stabilization phase and entered a new phase of actively developing their portfolio and are proving themselves as a reliable partner for companies - whether as a temporary alternative to government financial aid, as a catalyst for realising operational value potentials after the crisis (e.g. through digitalisation) or as a potential buyer of promising and sustainable business models. Of course, we are still in the midst of a crisis of unprecedented magnitude, but we believe that after a brief pause we will observe a high level of PE activity in the market. PEs are problem solvers and have worked hard to establish a strong reputation as partners to SMEs and large corporations in recent years. Based on this trust, we are going to see many creative and previously unseen forms of collaboration.
What measures should private equity firms take now?
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