Where do the post-pandemic opportunities lie for private equity?
Covid-19 fallout continues to hit firms across the world, both in terms of supply and demand, and the predicted ensuing recession is likely to change how we live in the future. While the outbreak has unsettled lives and businesses across the world, delaying deal processes and fundraising, there are ‘new world’ sectors that will do well.
As pointed out by Nigel Green, chief executive and founder of deVere Group, the current disruption will mean there will be investment opportunities opening up in new areas.
“New industries will come into their own and, as ever, there will be winners and losers," says Green. "This will mean job losses in some sectors and huge - possibly unprecedented - job and investment opportunities in others.”
Green believes it could speed up the Fourth Revolution, including advances in AI and mobile supercomputing. “Big tech is just one likely winner," he says. "The likes of Apple, Facebook, Amazon, and Google’s parent company Alphabet have immense cash reserves to continue, maybe even bolster, research and development and to sustain their business operations.”
Other sectors that may do well, in Green's view, are pharmaceutical and healthcare firms, delivery brands, supermarkets and manufacturers of electronic goods, such as fridges and freezers.
Before shifting focus towards readjusting portfolios however, many private equity firms are mainly preoccupied with sifting through the turmoil that the recent Covid-19 havoc has wreaked across current investments.
According to Jeremiah Connolly, partner at global consulting firm Mckinsey and Company, private equity firms are focusing first on stabilising internal operations, as well as those of their portfolio companies.
“The best-prepared firms are focused on workforce protection, including work-from-home where possible, plus supply chain and financial stabilisation and liquidity. Portfolio companies should also be engaging customers to maintain a connection even as shopping behaviour is rapidly shifting to new modes,” he says.
Working from home is one challenge, and following the immediate actions required, there will be both short and long term strategies to follow up on for the industry as a whole. “At the GP level, there is a lot of focus on internal firm operations, such as setting up communications so that deal teams can continue to make fast but good decisions in a newly distributed work environment,” explains Connolly.
Then it will be all about prioritising. “After these near-term steps, PE firms will need to determine where in the portfolio to focus their efforts to manage health risks, ensure ongoing liquidity, and other priorities, Connolly continues, adding: “Some will also start to evaluate how to come out of this crisis stronger, for example by accelerating a retailer’s transition to an omnichannel approach or by diversifying a supply base.”
Private equity firms are also holding off on new deals. According to Alexander Edlich, senior partner at McKinsey and Company, most firms are focused on their current portfolios, right now, and have eased off the gas on new deals.
“For those still seriously considering new transactions, their pipelines have dried up considerably and — even where they find interesting opportunities with keen sellers — availability of financing is uncertain,” he says. “That said, funds with flexible equity-and-debt mandates plus rescue financing are swamped by their pipelines. What might have been an ‘interesting-but-a-pass’ investment a year ago is now very actionable in the secondary market. Yet their threshold question has become: ‘What truly is the worst case scenario for revenue’?”
David Duke is managing director of business development at US-based private investment firm Kian Capital. With USD425 million of capital under management and 17 current investments, the firm focuses on middle-market businesses.
Duke expects the impact of Covid-19 to be felt across the entire economy. He says that some of Kian’s portfolio companies are on the leading edge of this crisis and are feeling its dramatic negative consequences now, while for others the full impact will not be felt for weeks, or perhaps a few months.
“At Kian, we are focused inwardly on our portfolios but are also staying in constant contact with our intermediary network. For the most part, we are hearing that deals are being paused or placed on hold across a wide array of industries regardless of the underlying businesses’ level of direct impact given the remaining uncertainty. Moving forward, we will be identifying sub sectors in our focus areas that may be well positioned for the long term in this changing economic landscape we’ll all face,” he explains.
With regards to the tough climate and current challenges, Duke emphasises his firm’s concerns about the threat Covid-19 poses to all of its stakeholders – employees, customers, suppliers, investors and deal flow partners.
“As such, we are first focused on everyone’s well-being and are taking necessary precautions to ensure all team members and communities are healthy and safe. For instance, we’ve gone to work remotely at Kian to do our part to ensure the health and safety of our staff, their families and the public in general,” he says.
Kian Capital expects to contribute financially and otherwise to ensure the long-term viability of its portfolio companies.
“We are proactively working with our management teams in real time to ensure they have the resources and liquidity needed to weather the challenging economic environment caused by this pandemic. This may require some difficult decisions and shared sacrifice across all stakeholders,” he says.
Duke concedes that while Kian Capital is focused inwardly right now, there will be opportunities going forward for private equity firms as paradigms shift in the economy, and consumers alter their lifestyles. These opportunities will be found mainly in areas with newfound value in the new economy.
“We could see them in remote learning, certain segments of distribution, contract manufacturing in health-related products, prepared foods, and healthcare diagnostics, to name a few. In essence, we see opportunities in products or services that have illustrated value to customers in ways not appreciated in the past,” he explains.
“In the near term, we will be looking for ways in which Kian can be a solution to closely held businesses as not only a source of long-term capital but as a partner to ride through tough times like those we are facing now,” concludes Duke.