Private equity (PE) is a very international and well-networked industry, and hence particularly exposed to the impact of COVID-19. The industry has weathered past financial crises and has the muscle memory, innovation capability and resilience to work through such unprecedented disruption. The effectiveness of the PE sector’s response will be important for the economy, given that many PE firms are relatively small and nimble organizations that collectively manage billions of dollars of financial assets and represent a major global network of revenues, supply chains, customers and people. Globally, over US$2 trillion in “dry powder” awaits investment when economic recovery opportunities arise.
Like most businesses, the PE industry is currently focused on business continuity for their existing portfolio companies. This applies especially to their funding and liquidity, working capital optimization and business support. Many funds have closed their offices and are working remotely, and most have the right technology and tools to make this happen. Despite this, we are seeing transactions being disrupted or put on hold. We believe this is likely to continue in the near term, given the reliance on travel and meetings that underpin thorough transaction evaluation.
Nevertheless, various processes are continuing, and PE firms and advisors are quickly adapting to new ways of working remotely with greatly reduced face-to-face interaction. Besides these practical considerations, pricing assets will remain challenging until the financial, operational and people effects of COVID-19 are better understood, and this is similarly affecting decision making in the leveraged debt market.
In ASPAC, businesses are supported by various government support mechanisms and nearly all banks are so far proving to be highly supportive of existing credit lines, some of which are backed by PE funds. While we predict that not all PE-backed businesses in Asia will survive this crisis, we do not currently expect mass liquidations due to covenant breaches but rather an increase in consensual refinancing and restructuring activity. The extent of such activities will differ across each country and significantly depend on the level of government intervention to support the financial system, businesses, employment, as well as essential services & operations during the pandemic.
PE-backed businesses remain resilient in parts of the global economy. Sectors such as Healthcare, Telecommunications, Transport and Logistics, and certain Digital Services and New Economy disruptors are facing unprecedented demand. This presents its own issues for supply chain and customer management against a background of operational restrictions arising from social distancing.
Clearly, the extent or duration of the current disruption is unknown at present, which makes forecasting demand and short term cashflow difficult. In these circumstances, having a strategy for short- and medium-term liquidity management should be front of mind for any business with significant borrowings or medium-term cash needs.
One of the lessons we learnt from the 2008 global financial crisis (GFC) is that lenders are prepared to be flexible if carefully managed and effectively included in the solution. We have every expectation that financing banks with government and regulatory support will continue to be responsible stakeholders so as to minimize longer-term economic damage.
While the current pandemic is a global human tragedy, we also know that global economic shocks often produce asset mispricing which can lead to significant investment opportunities. As a case in point, the 2009 investment vintage (post GFC) was regarded as one of the better global vintages in the last 20 years.
Currently we see strong PE focus on immediate credit investment situations where quality businesses face immediate cash needs. As we begin the road to recovery, we expect the PE focus to move toward rapidly deploying capital into quality equity investment opportunities in a new world where consumer, business and government priorities will likely have changed.
The PE sector has proven to be nimble and robust in dealing with challenging times. Its ability to outperform public markets and other asset classes over the full economic cycle is well known and understood by stakeholders. As this terrible crisis eventually passes, we expect enormous opportunities where valuations do not reflect long term economic prospects in the future state “new world”.