Opportunities for private equity post-COVID-19

How can Australian private equity firms help reverse the economic damage?

Over $13 billion of dry powder is currently with Australian private equity funds. With COVID-19, that money is poised to be deployed.

The COVID-19 crisis has had a damaging impact on the economy—in a matter of weeks, once-safe assumptions about the economy have evaporated.  Government policymakers have pumped billions of dollars into small-to medium sized businesses to help keep them from laying off workers. The impacts will likely reverberate for months and years to come

In time, the virus will subside, and economic life will begin to return to normal. But by whom? Other than governments and central banks, very few entities have the kind of dollars that may be needed to help restart company growth, make vital investments, rehire workers, and restructure debt. Even then, deciding where to invest and what to save is a rare skill.

That’s why it’s important to recognize the role private equity firms can play in this environment. While they are perhaps best known for buyouts—and the fire such deals often inspire—private equity firms can also create value through their work in particularly challenging economic moments. These firms have the ability to take positions in out-of-favour companies and sectors, guide portfolio company management, and help grow businesses steadily over several years. The outsized returns these firms are able to generate often only emerge when the economy, and the companies they own, fully recover. In short, private equity firms can invest when so many others are afraid to act.

Stepping up to the plate

Such fear is in full force. An increasing number of companies and economic sectors are under severe pressure. Even if they were healthy and well-capitalized before COVID-19, today is a different story. Hundreds of thousands of jobs have been lost and many businesses are at risk.

This is a classic scenario where private equity can play a role. Those with the greatest prospects may not have been for sale before; now, they may be considering additional funding alternatives. Private equity can bring capital to the table, potentially preserving jobs, restructuring debt, and helping managers lead their companies through this next period. 

In these first few months of confronting the COVID-19 crisis, perhaps it was hard to see that outcome, but some of the leading private equity firms are already envisioning how to get there. What’s more, they’re collectively sitting on approximately $13 billion of dry powder to help keep their existing portfolio companies going, potentially investing in firms suddenly in distress, helping transform companies and entire industries, as well as pursuing other growth and value creating measures.

Avoiding a repeat

What’s more, many private equity firms have seen these challenges before—even if not on this scale. During the last major economic crisis—the global financial crisis of 2007–08—many firms and their investors ratcheted back rapidly and stayed on the sidelines. That meant that these funds missed out on opportunities that existed when things looked bleakest.

Those lessons were not forgotten. We have heard from private equity executives that the kinds of returns expected to be captured will depend on what they do in the next 6 to 18 months.

Several paths to deal-making are open to firms in the months to come, in addition to taking growth equity positions, some public companies may be amenable to going private; some could look to make minority cash infusions in public equities (so-called PIPE transactions); and others may look to shed noncore assets. Many strategic finance roads are likely to present themselves.

That doesn’t mean, however, that the race will be to the swift. Many funds are not rushing to put their capital to work right away. They need more information about COVID-19’s impact and progress toward containing the virus. The firms willing to invest their dry powder in this environment may take their time and choose their targets carefully. Given the relative absence of competition from other investors, they can afford to hold their fire.

A test of leadership

Life will most likely be different, and private equity firms should want to make sure their portfolio companies respond to the new reality. Every aspect of running a business—sourcing talent, engaging customers, building supply chains, honing digital brand strategies, ratcheting up cybersecurity and data controls—may have to be rethought and redesigned. Private equity firms should
drive those conversations and lead transformation where necessary.

Doing all of this can test any private equity firm and its leadership; not all will be able to take this on at once. That’s to be expected, especially given the still-developing scale of the crisis and its aftermath.

The competitive landscape in private equity may well be reshaped by this moment; those who recognize the potential opportunities—and act on them efficiently and strategically—may be able to leapfrog those who merely wait out
the next few months until the water seems calmer. Either way, those firms that
emerge stronger in the post–COVID-19 period are likely to find their reputations, and that of private equity in general, enhanced.

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