As stay-at-home orders are taking their toll on the economy and businesses are in need of cash, the private equity industry could be well positioned to pick up better priced assets in the backwaters of the crisis.
David Mussafer, chairman and managing partner of Advent International, told the Financial Times on 5 April that there is now “an opportunity for us to get involved with some of the most incredible businesses on the planet that heretofore might not have been interested, or needed capital, or sought a partner,” particularly in the technology, healthcare and consumer sectors.
Is this, as pointed out by Mussafer, private equity’s chance to use some of its dry powder to pick up distressed assets in the wake of the crisis?
Quest, a Canaccord Genuity proprietary stock screening and idea generation tool, seems to think so, having recently named British fashion house Burberry, car parts and bicycle retailer Halfords and Pets at Home, among others, as potential takeover targets for private buyers.
According to Troy Pospisil, CEO of InCloudCounsel, a provider for processing legal work, it’s more important than ever that firms focus on the industries and transaction types where they have a unique strategic advantage given how much uncertainty there is in the coming months, however. “If investors venture too far outside of their circle of competence, they increase the risk of catching the proverbial falling knife,” says Pospisil.
And first and foremost focus is on the current portfolio situation. “In the near term, investors are focused on working with their portfolio companies to make sure they have the liquidity and runway they need to weather whatever negative impacts they are experiencing to revenue and earnings. Deal professionals are working around the clock with management teams to take a hard look at all cash leaving the company,” explains Pospisil.
He continues: “Tactically this translates to working with lenders to defer interest payments, working with landlords to amend leases to abate or defer rent payments and surgically cutting expenses in almost every line item, hopefully without harming the company’s ability to spring back to life once the economy opens back up.”
Then, it will be about assessing the quality of any potential targets, not just looking for low valuations. “Going forward, private equity firms will want to jump back to looking at new investment opportunities. There is still an historically high amount of dry powder ready to invest. On the back of any downturn, smart investors will be looking to invest in fundamentally strong companies at good valuations,” says Pospisil.
Werner Schnorf, who heads up Swiss alternative asset management company Patrimonium’s private equity activities, views healthcare, the ageing population trend, as well as all themes relating to home office needs, business IT solutions, home schooling, e-learning and home shopping, as attractive sectors at the moment.
“I think we will see shifts in how we interact and this will bring new opportunities. I also think supply chains will be rearranged with opportunities, but also risks, for an investor. Machinery will be difficult and needs some more time to see who will survive and to have a better assessment for a fair pricing,” says Schnorf. “There are some companies with liquidity stress, but often their business model or their market position was not really superb before the crisis, either.”
Keeping portfolio companies healthy and looking for add-on opportunities are priorities for his division at the moment, followed by investing in companies with good management as well as the intention of not falling for “cheap” deals or companies in the current climate.
Schnorf believes there will definitely be less leverage as private equity comes out on the other side of the pandemic.
“The industry should focus on what private equity is in the market for: developing companies in a sustainable way instead of prioritising maximising personal wealth,” he says.