Covid-19: A shift in private equity operational behaviours

Natasha Head, Maitland

By Natasha Head, business development manager, ManCo services & PERE, Maitland – The impact of Covid-19 on the global private equity market is uncertain. December 2019 concluded a very strong decade, a period of significant growth with overwhelming fundraising figures and outperformance of public markets. There was a bright path ahead: a time for real consolidation, focus on operating models, ESG and diversity, growth of the secondaries market and increase capital flow to new jurisdictions.

Covid-19 has caused an unexpected shock to the start of the new decade and will inevitably dampen the predicted growth. However, private equity has proven resilience during previous economic downturns and it is unlikely that the market will sit still for long. The current crisis opens up a vast number of opportunities at a time when private equity firms are sitting on mountains of dry powder – an estimated USD2.5 trillion (Dec 2019) according to Bain & Co.

From an operational perspective, the crisis environment has proven effective in changing certain habits and practices, many of which are likely to continue after the pandemic. Between new opportunities and enhanced operations, the private equity market may find itself in a stronger position towards the second half of the decade.

So, what key behavioural trends will not only be emerging out of lockdown, but here to stay?

GPs more nurturing to their portfolio companies

The current crisis has encouraged stronger communication between GPs and portfolio companies. GPs want to understand the operational and business concerns of their portfolio companies and the challenges they face. Portfolio companies have had to review their internal business plans and processes and discuss potential risks with their GPs, who can prepare to allocate capital and resources to help mitigate these risks.

GPs will be left with a deeper understanding of portfolio companies and the challenges they face on a day-to-day basis, encouraging more effective and regular communication going forward. 

A change in perspective for LPs

The biggest asset allocators in the private equity industry are institutional investors such as development finance institutions (DFIs) and pension funds. LPs have a good understanding of the current challenges and, rather than focusing on headline numbers and returns, they are looking at how their GPs have responded to the crisis and adjusted to manage risk. The emphasis has been on the fact that private equity is a long-term play. The impact of the pandemic will affect asset classes differently with delays in some cases. LPs are focusing on how GPs are responding to this and helping their portfolio companies to stabilise throughout the pandemic. 

LPs can see there are opportunities and want GPs to demonstrate how they are pivoting to take advantage of these and will be opening communications with each other, understanding what other LPs’ commitment landscapes look like so they can collaborate.

Enhanced Business Continuity Plans 

COVID-19 has not only demonstrated the importance of maintaining a strong BCP, but it has also put them to the test in the past few months with the sudden move to remote working, forcing firms to identify weaknesses and tackle these issues head on. Lockdowns have also forced GPs to look at their oversight of key service providers. Do they understand the BCP plan of their administrator and how that impacts their business and the service delivery they receive?

Remote working and spotlight on avoidable practices

Where businesses have been able to operate through a remote working environment, they have been forced to embrace a new style of working. A return to the office and meetings in-person is likely but this period will highlight areas that can benefit from remote capabilities such as alternatives to business travel. Fund raising and deal making have continued with GPs, LPs and portfolio companies adapting quickly to continue meeting prospective investors and investments virtually. 

Embracing new technologies

Managers are continuing to complete transactions remotely. Board meetings, due diligence and document signing are all being done remotely and while this will return to some normality after lockdown, it should help to streamline certain processes. 

Greater focus on ESG

ESG has always been a “hot topic” in the private equity industry, with DFIs allocating millions to ESG investments. Through conversations with clients, potential clients, LPs and industry bodies globally, it is clear that ESG is no longer a tick-box exercise in the due diligence process. There will be greater focus on understanding ESG factors, particularly governance and the impacts on underlying portfolio companies, regardless of whether a fund has an ESG focus.

Although the economy is tough globally, GPs will be successful and get back to the required levels of return if they can adapt to change, are resilient and proactively support their portfolio companies.

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