Some 89 per cent of private equity firms polled by New Street Group, the leadership and people solutions consultancy, say they are highly likely or likely to deploy capital in the next three-six months, suggesting funds see opportunities in the market amidst the coronavirus crisis.A sudden drop in share prices and valuations in recent weeks means there may be opportunities for PE funds to acquire UK businesses at a significant discount compared to historical averages.
In addition to strategic acquisitions, PE funds may also look to support stressed businesses recapitalise by buying strategic or controlling stakes.
The research showed PE funds polled will be looking to invest in businesses heavily impacted by coronavirus to help shore up their balance sheets. Seventy one per cent of those polled says they plan on investing into their existing portfolio who have seen their trading impacted by coronavirus and could benefit from an injection of additional capital.
Only 4 per cent of PE funds polled say their investee companies will tap the Government’s Coronavirus Business Interruption Loan (CBIL) scheme. New Street Group says that uncertainty over whether private equity backed companies qualify for CBIL funding has influenced this view. The Government is expected to provide clarity on this point next week.
The likelihood of an increase in distressed PE-backed companies is supported by the finding that 90 per cent of PE funds polled say restructuring costs, refinancing and reengineering their portfolios is a now top concern following the coronavirus outbreak.
New Street Group says a failure to source funding and mounting pressure to meet operating expenses is set to cause a surge in demand for Chief Restructuring Officers (CROs) and other experienced CFOs who can restructure these companies.
CROs focus on getting a company’s finances back to more stable levels which allows management to focus their efforts elsewhere within the company. A key element of the role is to quickly stabilise a company’s finances and to prevent lenders from calling in loans and triggering an insolvency whilst negotiating a restructure.
Other findings from the survey conducted by New Street Group include:
• 76 per cent of PE firms polled say within their portfolio, the retail and leisure sector is the most affected by coronavirus
• Surprisingly only 38 per cent of PE firms polled believe coronavirus will have a greater impact on their fund performance than the 2008 financial crisis
Chris Clegg, Chairman at New Street Group and UK head of European private equity investor Nimbus, says: “PE funds are slowly starting to re-adjust to see more opportunities to invest as they stabilise their existing portfolios.”
“Before the coronavirus crisis struck, PE firms were sitting on huge amounts of dry powder. Fund managers now will be rapidly allocating uninvested funds to the stronger assets within their portfolio whilst hunting for bargains in sectors that have been relatively robust through the COVID crisis. Special situation investors will be the first to get their cheque books out for new investment.”
“Trends to look out for will be global groups offloading non-core assets and an increase in debt for equity swaps as funders re-price their support to struggling businesses. As we witnessed after the financial crisis, capital will chase the strong assets both in terms of debt and equity. For those struggling with high levels of gearing, fundamental restructuring will be the key to survival. This rising demand for restructuring specialists will not be met by supply – the number of CROs with proven track records since the financial crisis is very limited.”
