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“Private equity funds are holding decisions on M&A,” says Eight Advisory

As WHO classed the Coronavirus outbreak as a pandemic yesterday and governments are taking increasingly significant steps to ensure that businesses can weather the storm, private equity firms are holding back on M&A for the time being, according to Eight Advisory.

As the UK Government is about to step up its response and move from “contain” to “delay” phase, while the Chancellor announces measures for how small businesses can cope with the negative effects of Covid-19, the full impact of the outbreak on the private equity industry remains to be seen.

“Businesses that were presenting attractive medium and long term growth prospects are now scrambling to analyse the current impact of Coronavirus with both direct and indirect consequences,” said Justin Welstead, partner and head of transaction services at business advisory firm Eight Advisory, a European business advisory firm specialising in M&A, transactions and restructurings for private equity firms.

In Welstead’s view, the industries which will see the most immediate impact are the aviation, travel and hospitality sectors, with increasing widespread effects as time goes by.

“Similarly, those with a Chinese supply chain, in spite of the potentially rapid return of productivity, are being hit hardest. Broadly, Corporates are having to consider whether a thorough review of their operations, supply chains and working environment, is required to weather the storm most effectively,” he added.

As a consequence, private equity funds are exercising caution, holding decisions on M&A, as historical and current trading performance is overshadowed by sensitivity analysis and the freezing of the debt market, according to Welstead. 

“For deals that do continue, it is probable that there will be a greater deal of conditionality with the return of material adverse change clauses and earn-outs,” he continued.

“In turn, private equity funds have turned their focus back to diligently working on their portfolios, assessing operational and cost flexibility, modelling short term cash flow scenarios and speaking to suppliers and banks to ensure they have the liquidity to navigate the months to come,” concluded Welstead.

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