COVID-19: Rewriting private equity's playbook
How coronavirus is changing the economic landscape
INSIGHT ARTICLE |
A watershed moment for private equity
The coronavirus outbreak has become a watershed moment for the private equity (PE) industry—and very quickly. As the calendar turned on Jan. 1, the PE industry was wrapping up another robust year and some were anticipating another in 2020. In the span of mere weeks, however, the COVID-19 crisis took hold and governments around the world locked down large parts of their populations.
Businesses, however, can’t be cryogenically frozen in place without repercussions. The PE industry, despite being larger today than ever before, has been hit hard by the closures and will be wrestling with aftershocks for the foreseeable future.
On the positive side, the industry has three factors in its favor: record amounts of dry powder, accommodative fiscal policies from the federal government and low interest rates. Despite the unprecedented nature of the crisis, fundamentals within certain industries remain strong. Yet economic indicators appear contradictory in places. The CEO Confidence Index, for example, is much higher than it was during the financial crisis of 2008 even as unemployment rates stand significantly higher than 12 years ago. The potential economic problems of 2020 are deeper than they were in 2008, but today’s crisis is not systemic. Uncertainty plays a more prominent role this time, and a wide range of outcomes is possible depending on how soon a vaccine is developed.
This puts the PE industry in a tricky position. There are more fires to put out, but there is also more capital available to extinguish them. PE firms are putting capital to humanitarian use across the industry. Some have set up employee assistance funds that cover health care costs for portfolio company employees. Others have used fund capital to cover salaries for employees who tested positive for COVID-19. At least one firm has hired an expert from the Centers for Disease Control and Prevention (CDC) to provide dedicated guidance to its portfolio companies, while others are investing more in portfolio company IT infrastructure to allow employees to work from home.
As most PE funds and portfolio companies are not eligible to access U.S. government stimulus aid, PE is effectively injecting rescue capital to existing portfolio companies as they navigate the crisis. There will also be investment opportunities, as we’ll discuss in Part 2 of this report, but many of them will be for strong companies that were performing well before the outbreak and are experiencing temporary distress. PE, in other words, will help prevent more bankruptcies in an unprecedented scenario.
The full report can be found here.
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The Paycheck Protection Program excludes some PE owned portfolio companies from receiving emergency loans established by the CARES Act.