Private equity (PE) firms are seeing two key developments as business plummets amid the COVID-19 pandemic. First, funds are working more closely with their portfolio companies to manage the business. Second, the economic fallout is disrupting the deal pipeline throughout the market.
In reality, not all business is plummeting. While most industries face severe dips in revenue and are managing cash flow crunches, some are seeing increased or at least stable revenue. Those companies—healthcare supply and remote-work technologies stand out—must manage new challenges around supply chains and employee safety. Their management, including their PE sponsors, must respond accordingly.
As firms continue to grapple with this crisis, BDO's Private Equity team gathered private equity leaders for a virtual roundtable. Participants shared how they are dealing with the COVID-19 crisis, how they are helping their portfolio companies weather the storm, and how they think private equity will fare in the coming months. This article cites their comments by name for information that is not confidential.
Difficult HR decisions: Act now or wait and see?
PE firms at our roundtable are bracing for difficult decisions to protect their portfolio companies' liquidity during the economic downturn. Most are either considering workforce cuts or have already made some. Future actions depend on how long physical distancing lasts and—more importantly—when and how the economy recovers.
“Our approach is really to manage as if this is going to be a long-term situation,” said one participant. “I think our cuts have been fairly sizable, with a desire to conserve cash over the long-term. Our concern is six months from now, banks may not be as forgiving as they are today, and you're going to be stuck with some tough situations. We'd rather be proactive.”
What concerns PE firms and their portfolio companies is striking the right balance.
On the one hand, management teams have spent their entire careers building profitable, sustainable businesses. They don't want to terminate valued employees or disrupt high-performing teams. On the other hand, as one participant pointed out, terminations now may be necessary to remain liquid.
“You'd rather be scrambling to find resources to build back up than not have that opportunity because you didn't take some pretty tough decisions today.”
Staying connected with portfolio companies
Participants reported a specific challenge when staying connected with their portfolio companies: Just when management needs their guidance the most, communication has become more remote. PEs are adjusting to the new reality.
“While we haven't been able to go on site as much as we'd like to,” said Mark MacPherson of Argyle Capital Partners, “we certainly have had quite a bit of contact with the teams. Before it might have been one day a week and now it might be every day with folks.”
For the funds' mid-market portfolio companies, the PE firm's guidance is especially critical whenever business is not as usual. Smaller companies often lack the internal expertise on niche but key subjects. During the COVID-19 crisis, firms see their role as supporting management through these niche subjects, so they can focus on running the day-to-day of the business. Functions can range from staying up to date on government programs to talking with human-resource consultants to working with financial institutions.
“We're big believers in meeting face to face,” said one roundtable participant, “because we think that's the best way to try and develop relationships and help our management teams. But what's interesting is because we're so connected by phone and video conference, I feel more connected with our team today than I've ever felt.”