With many PE deals on hold, when will confidence improve?

Tokyo

As an asset class with a buy-to-sell cycle that typically lasts around five to seven years, you would be forgiven for thinking that private equity could weather the storm of Covid-19 more smoothly than other, more inherently volatile asset classes, can. That’s partly true.

But there are aspects, including fundraising efforts, and how it affects private equity firms’ portfolio companies, their employees, and other areas, that have been dealt a blow when it comes to this novel coronavirus pandemic.

For example, The Carlyle Group’s managing director and head of the Carlyle Japan buyout advisory team, Tokyo-based Kazuhiro Yamada, recently commented that every portfolio company will have “some impact” from Covid-19 induced chaos, as reported by Private Equity International.

And the effects of the virus show themselves widely in the slump in deal making activity as well. According to some reports, as many as 90 per cent of private equity deals are currently on hold worldwide. 

In the view of Joerg Zirener, senior managing director at private equity group One Equity Partners, the delay, when it comes to private equity groups’ deal making, is due to the uncertainty around future earnings and cash-flow outlook, as well as the difficulty in securing new financing. Moreover, at this point in time, our “understanding about the duration of COVID-19 is difficult to determine.”

With more than USD6 billion in assets under management, One Equity Partners is a New York-based middle market private equity firm focused on investments within the industrial, healthcare and tech sectors in North America and Europe. 

For deal making to start again Zierner says: “New infections need to go down, lockdowns need to stop, and the ability to properly forecast earnings and revenues need to be restored.”

And When it comes to restoring confidence, he is sure that that the number of new infections will be key. "We suspect this will happen slowly by the end of April in Europe and a bit later in the US. The Southern Hemisphere will remain an issue, though, as it continues to lag behind with respect to the spread of Covid-19 in the Northern Hemisphere,” he says.

According to Lars Dybkjær, managing partner of GRO Capital, a Copenhagen-based growth investor, the reason why so many deals are on hold at the moment is due to uncertainty and the fact that valuations are coming down. GRO Capital typically deploys between EUR10 million and EUR50 million of equity, buying both minority and majority stakes. The Scandinavian software investor bucked the trend when it invested in Danish virtual waiting room software company Queue-it only a few days ago.

“Things need to stabilise [in order for deal making to start again], but for those with risk appetite, deals could start coming back shortly, especially if sellers are eager to sell and accept lower valuations,” he explains.

Right now, says Dybkjær, everyone focused on the number of new Corona cases; when the numbers are reversing things may happen quickly.

Regarding the role of private equity in the recovery process, Dybkjær says he is optimistic with regard to “some areas”.

“We only invest in business-to-business software and this crisis will only increase focus on technology, especially with people being reluctant to travel. The business model with long license contracts with customers also secures some cash flow in these companies making this area interesting. Other areas will take a long time to recover,” he concludes.