Private equity firms admit that demand for their investee companies’ services has taken a substantial hit from Covid-19 – but institutional clients seem confident that their PE portfolios are well set to bounce back from the pandemic, given the support they can provide to businesses.
According to a Willis Towers Watson survey published yesterday (July 8), nearly half of PE managers said that their portfolio companies had suffered a “medium” or “high” impact from the pandemic-driven slowdown.
Consumer discretionary businesses – such as restaurants, gyms and retail – took the biggest hit, unsurprisingly, with 40% of respondents citing a high impact on demand. That segment, however, only accounted for 14% of portfolios of those surveyed. Information technology, a sector more resilient to the crisis, accounted for 32%.
PE firms said the impact of Covid-19 had largely been low on areas such as the capital structure and operations of portfolio companies (see chart below).
Willis Towers Watson conducted the survey of general partners (GPs) in April to assess how PE managers’ businesses were performing and their expectations for the next two to three months.
At that point, despite the huge expected economic impact of the coronavirus, GPs’ investor clients – or limited partners (LPs) – appeared sanguine about their portfolios. Since April 1, though, the number of coronavirus deaths worldwide has multiplied to nearly 550,000, from around 50,000.
US asset manager Neuberger Berman, a private equity LP, has done a study of downturns prior to Covid-19 and their impact on the PE market, Joana Scaff, head of European private equity, said on April 6. She was speaking during a webinar hosted by Real Deals.
The study, which focused on US buyout funds, analysed 25 years of data from 1994 to 2019 and focused on two large economic downturns, from Q1 2000 to Q4 2003 and from Q3 2007 to Q4 2009.
In those periods, PE valuations generally followed public market declines but with a time lag of about a quarter or so, Scaff said. The PE valuations declined, peak-to-trough, by around half as much as by the public equity indexes, and they also tended to recover more quickly than the listed stocks.
She admitted, however, that the current slowdown was greater in scale than previous ones. “[Before Covid-19 hit,] we had prepared for a recession and market downturn, but this crisis is much more than that. It is a broad, far-reaching economic shutdown; many sectors are being impacted.”
In March, during the initial few weeks of the outbreak, Neuberger Berman had been focused on areas such as assessing the risk for operations and on the capital structure of its portfolio companies.
PROVIDING CAPITAL SUPPORT
But in April the firm was “gradually going to shift a bit more to the offence strategy”, Scaff said. “That would be ‘how can we help? Can we provide liquidity to good businesses that are solid but going through rough times? Can we save those companies while earning a good risk-adjusted return for our investors?'”
Similarly, Yup Kim, senior portfolio manager for private equity at the $60 billion Alaska Permanent Fund, said during the same webinar: “The most important value-add that we have as investors is capital, so we are providing that to our portfolio companies – to help them emerge from the other side of this pandemic.”
Ensuring liquidity for portfolio companies has been a key focus during the pandemic, agreed Gilles Collombin, investor relations partner at Charterhouse Capital Partners, a London-based PE manager.
Indeed, liquidity was indeed the top concern of Asia-based investors responding to a CFA survey published yesterday.
But a major challenge is forecasting how businesses will fare further down the line, Collombin said during the webinar.
“Everyone is capable of having a view on where a company will be in three months’ time. Having a view on where it will be at the end of the year is much more difficult because you will then have some systemic impact on the economy as well.
“The only thing you can do is be ready for the worst and try to make sure that whatever cash you may have to inject into the business at some stage, you are well aware ... how you will fund it,” Collombin added.
“[And] that if you are going to fund it by calling money from LPs, you give them enough notice on that,” he said.
Certainly, some investors feel that the market may underestimate the willingness of PE firms to help corporates to avoid defaults as a result of the slowdown.
Ultimately, the Willis Towers Watson report noted, private equity-owned companies have some structural advantages that allow them to navigate crises better, such as access to high-quality expertise and access to capital.