Coronavirus update: This time it’s different – is it? by Rupert Bell, Principal Consultant

23 March 2020 | Rupert Bell, Director of DACH

The news flow from our market sources in the last 24 hours indicates a continued focus on portfolio priorities, including taking steps to apply for government financial support packages, where appropriate. Decision making is largely being pushed out; whether relating to fundraising, deal making or recruitment. However, we have seen some talk of deals continuing, sometimes with terms sheets redrafted or valuations adjusted. One firm talked about a turbo due diligence process to drive through remaining work on advanced deals. Similarly, on the recruitment front, several firms are making formal offers to candidates and beginning new search mandates. We may still see that hiring plans are being delayed rather than changed.

A key theme in our conversations with the market has been lead partners drawing on their memories of past recessions to identify businesses which might be most under liquidity pressure. Make no mistake, this situation is serious and the next few months are going to hurt, but we have been thinking back to 2008 and many of the partners I’ve spoken to recently and much that I’ve read suggests that the whole industry is better prepared for a downturn this time round.

The private equity market has become more sophisticated and deeper entry diligence on investment has generally given firms a better understanding of what they have acquired. Management information systems are offering better real-time data to drive faster responses. LPs have moved to assess the landscape quickly, and as the bridge to the GP management, investor relations teams have developed to become a much more technical, mission critical part of the fund. Data is being prepared in a more granular and informative fashion, and the hope is investors can be more supportive once they understand the issues.

In some cases, the dependence on debt has lessened. Many GPs are quick to stress the number of all equity investments in their portfolio, suggesting less pressure from banks; furthermore, for those who are in leverage structures, years of covenant lite structures ought to mean funds have breathing space to put plans in place. On the other hand, valuations in the last two to three years have hit an all-time high as have leverage ratios, so for some assets the outlook must be more mixed. Even so, the emergence of specialist debt funds, relatively free from the capital ratio scrutiny faced by banks last time round, may also lead to more measured responses from lenders.

Finally, something we’ve been heavily involved in recently at PER is helping firms to establish and grow dedicated value creation teams, which are giving firms extra resources and experience to prepare for the financial impact of coronavirus in the portfolio. With more coordination between funds and their investments than ever before, there’s a better chance that timely interventions can help struggling companies to pull through. We will be commenting further on how we can provide access to this type of talent in the weeks to come.

Firms we talk to are clearly alive to opportunities beyond the crisis phase, whether LPs anticipating secondary trades at the fund level, or direct investors wanting to be ready for the upswing as the market recovers, remembering the old adage to try to buy at the bottom.

In the coming weeks, we’ll continue to track the impact of coronavirus on the industry and share intelligence with you. In the meanwhile, if you have any questions or would like to discuss your firm’s hiring plans, please get in touch.

About the author

Rupert is a Principal Consultant, Director of DACH and a member of our leadership team. He set up and leads our DACH business, opening in Munich in 2010 and Frankfurt in 2017.

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