COVID-19 Crisis is causing Private Equity to rethink CPG Investment Strategies

The COVID-19 Pandemic has created an unprecedented time of uncertainty and is pushing consumers to pile up their food stocks in anticipation of a shortage occasioned by strained operations in the manufacturing and distribution sectors.

While this has generally boosted retail sales especially for food and beverage brands, it is altering how PE firms will be investing in Consumer-Packaged Goods (CPG) moving forward.

Firms are seeing a situation whereby there will be a surge in demand for immunity-boosters during and after the Coronavirus age, coupled with a few other popular products including free-form, plant-based, and low sugar.

As per the COO of Cambridge Companies SPG, “It is safe to say that there is no getting back to normal after this public health crisis subsides.”

“This event will help bolster the health and wellness industry, and immunity support will continue to flourish, and spur new innovation across the sector.”

Already, companies dealing in immunity-based products such as Zhou’s Elder-Mune gummies have reportedly run out of stock. Vive Organic, an immunity shots firm has seen its sales soar to all-time highs and according to them, the trend is not expected to slow down any time soon.

“It’s possible that over the next three to ten years, concerns around the flu and boosting our immune systems will remain at a new high, and this will, in turn, drive purchase behavior and intent,” Vive Organic CEO Wyatt Taubman said in a statement.

Long-term Impact

Experts expect the sales of new CPG brands to be impacted by the pandemic in the long term. As consumers plan for quarantine, it is typical for them to purchase products they wouldn’t typically buy. That is gradually becoming a national demo program that companies are being paid for.

Brands are also betting on the new consumer habits to expose their products to the masses, have customers use them and have positive experiences, and opt to incorporate the items in their daily routines once normalcy eventually returns.

In an unforeseeable future, firms are expected to focus on CPG brands but perhaps more specifically on health and wellness daily use products.

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Challenges and Opportunities: US Private Equity Outlook in 2020

The outlook of the year has dramatically been impacted by the COVID-19 Pandemic, with investment strategies, portfolio companies and private equity firms being severely tested. But even without the pandemic, many factors that complicated matters in the last year continue to plague PE markets in 2020, defying general partners (GPs) and their time-tested protocols, but they also present opportunities for those daring enough to strike when least expected.

In terms of challenges, the presence of excessive dry powder in the markets continues to haunt firms, mostly occasioned by diminishing opportunities in the wake of an increase in the number of PE firms. 

According to Preqin’s Global Alternative Report for 2020, there are more than 8,400 PE firms globally with the US accounting for up a substantial chunk of that number, leading to a sharp spike in firm-to-firm competition. This has left thousands of PE firms with billions in unspent capital. 

And even as the number of firms and dry powder continues to rise, the amount of companies and ventures that may be available for sale has almost remained the same. Firms are avoiding auction processes because they believe it rapidly raises the multiple. In turn, the intensity rises as price tags go up.

With multiple funds participating in deals, firms are avoiding attracting cash only to strike deals two or three years later as it would make them appear incapable of employing capital or simply inferior.

But amid the challenges of being able to strike deals, firms have no choice but to somehow scout for deals – to enable them to put the contributed capital to work.

Challenges sire opportunities

With the COVID-19 Crisis, the Environmental, Social and Governance (ESG) considerations will bear far greater importance than before, with a focus on how PE firms will run and the enterprises they invest in. The current global pandemic will play a big role in catalyzing a shift to ‘green investing’.

Additionally, a need for greater transparency remains a top priority for firms and stakeholders, especially in portfolio management and performance. The growing importance of transparency and investor reporting is now reinventing opportunities for firms. At the heart of greater transparency and accountability lies technology, with digital solutions seen as the ultimate remedies.

In the past, PE firms tended to avoid tech-based companies as they were infamous for their high valuations. But these companies have demonstrated the ability to maintain strong revenue growths, resilience and solid fundamentals as most enterprises are now looking to digitize to stay in business amid the new normal that requires wide adoption of the ‘work-from-home’ approach.

Capital impairment is also relatively low in the tech field since applications are crucial and generally difficult to dislodge upon installation. 

In closing, deals in this sector have more than tripled over the last five years alone with the year-on-year growth rising to 26%. Considering how tough last year was for tech unicorns such as Uber and WeWork, there is certainly something to write home about in 2020.

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Navigating Private Equity Deal Making During a Pandemic

There is no doubt that Private Equity (PE) firms have tons of cash to put to work, but the Covid-19 lockdown measures are crippling operations. With travel restrictions, work from home directives, and economic uncertainty, it has become increasingly difficult for investment firms to do what they do best – scout around for lucrative investment deals!

The pandemic has changed the economy as we know it. US unemployment is at an all-time high since 1933 with some saying the worst is yet to come. Most sponsors are hardly making any placements and are instead choosing to hold on to cash owing to the growing economic uncertainty.

“I can’t take credit for the term, but it’s the Great Stay-In. Literally, everybody is staying in. On the deal front, the pipeline has been put on hold. We are in the middle of closing deals, but they were already in process,” Randy Schwimmer from Churchill Asset Management said.

While PE firms have always been known as some of the most pandemic-ready players in the economy, there seems to be a growing concern over whether or not firms will be able to navigate the current crisis, while maintaining level heads needed to strike good deals.

Experts say much of the current economic slump is due to uncertainty. Most sponsors are reluctant to engage as the impact of the pandemic remains unclear. And as investors put deals on hold, lenders are also thrown in a state of wait-and-see.

Survival

But some firms are heavily relying on virtual meetings to strike deals. 

Brad Armstrong, a partner at Lovell Minnick, indicated that: “While many conferences and in-person meetings are being cancelled, we continue to have productive discussions with new companies via phone or videoconference; in the long run, that’s the biggest leading indicator of future investment activity for us.”

The financial crisis of 2008 was certainly detrimental to America’s economy. However, on a much smaller scale, it served as a greatly important test of the private equity market. Data shows that companies in the private sector ultimately suffered far less than those not backed by PE firms because unlike many other businesses, private equity investors are better-placed to combat recessions.

The nature of the current crisis might be different and more intense than the 2008 disaster. However, the funds held by PE firms have skyrocketed to over 1.4 trillion dollars, and are set to be deployed. 

According to Peter L. Briger Jr., the CEO of Fortress Investment Group, the pandemic induced crisis “will present an opportunity for good lenders to participate in the great reconstruction to lift us out of this.” It’s only a matter of time before we find out who will take the best advantage of it.

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A Shift in Educational Technology Private Equity Investments

Educational Technology, otherwise known as the EdTech industry is among the few sectors where profit meets purpose. In recent times, there has been a rapid shift from gauging success in education from attendance to learning. Surprisingly, if today, you conducted a quick survey among Silicon Valley investors and entrepreneurs, you’re likely to conclude that there is still less emphasis on whether children are learning or not, and more focus on actual attendance. 

With the rise in impact investing, Private Equity (PE) firms have been at the centre of recent massive investments in EdTech. So far, more than $30 billion has been pumped across K-12 and workplace learning techs under five years.

PE firms are now attracted to investments in training systems, corporate education, and vocational training programs. While it may not be easy to fully comprehend the impact of education on uplifting communities, closing achievement gaps, or poverty eradication, the effect of private equity on the education sector is tangible and measurable. 

However, since the pandemic, schools and colleges are among the hardest hit. As of March 2020, 87% of the world’s student population has been affected by school closings. Graduation ceremonies, proms and other annual rites of passage have been postponed indefinitely or cancelled; but most importantly, students have been obligated to stay home, whether that meant they continued learning online or not.

Opportunities

Given the challenges faced in the past and today, many PE firms are now focusing on technology and vocational education. Developers will typically sell educational tech to schools and enterprises, where it helps decrease the cost of learning while boosting access to education.

As opposed to the conventional learning structure, vocational training offers skills-focused learning. The system nurtures innovation among learners, something that has caught the attention of PE investors.

According to CFA Jennifer Wong, Portfolio Manager at Glenmede, companies targeting lowering rates on student loans have received private equity backing in the past few years, which means some investors believe in their ability to generate returns. 

“You could also make the argument that on an impact basis, they have extended lower costs of education to more people. However, critics would also be quick to point out that while lower costs of education are now available, these products are not targeting those in most need,” Wong noted.

Moving forward, the Portfolio Manager at Glenmede projects a greater interest by Private Equity in impact investing in the education sector, coupled with an intersection between conventional financial players and pure impact investors.

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Differences in a Decade: Comparisons of Private Equity Then and Now

Private equity has undoubtedly undergone a dramatic shift from the last decade. As the role of PE evolves, people’s understanding of private equity has also shifted. A publication by Institutional Investor cited EY’s description of private equity as “one of the most profound shifts in the capital markets since the 19th century.”

But A lot has changed in PE over the last couple of years. We narrowed down our findings to two significant changes as highlighted below.

Fewer deals but more cash

One outstanding feature of today’ PE market is the amount of capital available for investment, with dry powder (amount of liquid assets or cash reserves available to an entity) recording new highs. Preqin, a data firm, estimates the presence of about $2.44 trillion of idle dry powder waiting to be invested in various sectors.

Due to the high volume of available capital, PE firms are closing more deals compared to the past years. By the first half of last year, an approximate $256 billion of leveraged buyouts had built up. Refinitiv noted that the figure was sufficient to qualify the first half of 2019 as the second-largest half in record.

A growing interest in middle markets

Another notable change seen in the current decade is a shift by firms to middle markets. Initially, medium-sized companies believed PE firms went only after the unicorns and multinationals. Indeed, nothing could be further from the truth.

The middle markets hold some of the most viable investment deals for PE firms. Despite much of the attention being focused on the large companies, their medium counterparts are presenting a formidable option for investors looking to grow their investments over time.

No doubt the 2010s were some of the most incredible years for private equity. The massive flow of capital coupled with growing secondary markets gave birth to a unique ecosystem for investment growth.

As firms continue to appreciate the importance and potential of middle markets, things are certainly bound to shift upwards.

And with a promising new decade, who knows what the roaring 20s will bring forth?

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Coronavirus (COVID-19): What this means for Private Equity Firms

Charlene Pedrolie.  What started as a mild virus outbreak at a city in China has now grown into a global pandemic, bringing global business operations to a standstill, while wiping billions of dollars from investors’ portfolios. Recent data as reported by Al Jazeera indicates that more than 25,000 lives globally have been lost to the virus so far, with the US currently leading in the number of new infections followed closely by Italy.

But for most investors, pandemics are not unchartered territories, despite the unique disruption of the order of business by COVID-19. Therefore, Private Equity (PE) firms are likely to be faced with certain issues, as outlined below:

Crisis Management and Response

Most underlying companies owned by PE firms aren’t meant to be held for a long period and as such, the companies may have fewer contingency strategies for dealing with emergencies. Besides facing the challenge of potential layoffs at portfolio companies, firms may also be faced with situations whereby hundreds of employees will be looking for direction and guidance during this crisis time.

Additionally, now more than ever, private equity firms may be dealing with increased cybersecurity threats owing to the significantly higher cases of remote system access by staff working from home and in quarantine.

Firms will need to establish crisis response structures for underlying companies, with clear responsibilities and accountabilities. Further, it will be important to identify and maintain key decision points to minimize the spread of the virus.

Finance and Liquidity

Firms ought to identify regions that have been hit hard by the crisis and quickly adopt new sets of rules and guidelines. Even with the ongoing calamity that has seen a sharp reduction in sales and revenue during the lockdown, private equity firms may still need to comply with conventional filing and compliance deadlines.

Lending indentures should also be taken to account as firms may be required to track and monitor related costs and losses.

To combat these challenges, PE firms may be required to monitor regulatory environments to stay on top of deadlines and compliance issues. It will also be necessary to review debt indentures with lenders and agree on how to deal with operating expenses and losses.

Customers

The COVID-19 outbreak has resulted in drastic changes in the behavior of both B2B and B2C customers. Customers have shifted from long term investments to necessities needed to survive the pandemic. Companies, on the other hand, have resolved to ramp down production to slow purchasing.

This means that private equity firms will need to drastically shift their business strategy, failure to which their survival may be at stake. Firms should consider revising sales strategies to adapt to the changing needs and preferences of customers.

On the brighter side, this is the perfect time for firms to consider venturing in new product lines such as the manufacturing of essential commodities. For example, medical and safety supplies such as hand sanitizers and masks are great bets right now. In other words, maintaining a balanced portfolio will guarantee a market rally during and after the lockdown.

Innovating and adopting dominant sales channels such as online stores as compared to physical stores may also prove worthwhile.

Feature image provided by:  123rf.com

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Upswing in Private Equity Investments in Healthcare Industry

The last decade saw investments by private equity firms in the healthcare sector balloon to record highs and according to experts, this new decade will not be any different. The analysts project a surge in investments in addiction treatment, mental health, and orthopedics.

In the US alone, PE deals in healthcare have more than doubled, according to financial data company Pitchbook. One of the most significant healthcare investments in the recent past is one by KKR, a $10-million injection into the purchase of Envision Healthcare. Around the same time, Evergreen Coast Capital and Veritas Capital took over Athenahealth in a public-private partnership deal.

In the face of global instability, last year’s healthcare industry deals by private equity hit a record $78.9 billion, made up of 313 deals, down from 2018’s 316.

Bain & Company’s Healthcare private equity practice co-leader  Kara Murphy in a statement said: “With valuation multiples arguably near a high, the bar is rising to invest and deliver differentiated deal returns in healthcare private equity,” adding “Funds will need to think proactively and creatively about their investment theses and put in a lot of hard work on value creation plans to deliver.  We are cautiously optimistic that investors that put in this hard work will continue to achieve industry-leading deal returns in the vibrant healthcare industry.”

Several variables contribute to the immense investments in the sector, mainly a growing need for healthcare. This primarily emanates from an aging worldwide population, treatment and growing incidences of chronic illnesses. Also, the rising levels of dry powder or uncalled capital need to be put to work. More individual and PE funds are investing in healthcare, given how well the sector held during the last recession as well as the current global COVID-19 pandemic.

As predicted by industry experts, last year was a period of continued investment in the healthcare sector. There’s no doubt that this year will provide more of the same, notwithstanding the current economic slowdown.

The entrance of PE into the healthcare industry will certainly prompt efficiency in the sector, resulting in long-term success while boosting healthcare service businesses’ valuations.

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