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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