The world as we know it is changing. How we all react will have far-reaching implications on ourselves, our families, our businesses, and our communities. The way that private and public market companies conduct business is evolving out of necessity, for now, and will continue this evolution well into the future. Normally, highly capitalized private financial markets are impacted on a smaller scale than public markets and the broad exposure that is incurred by public securities holding due to market volatility, but due to the severity of the most severe market drawdown since the financial crisis, private portfolio companies are certainly feeling the financial pressure.
These are the trends that we’re deriving from our discussions with private market investment managers and measures that we’re helping them implement to mitigate risk and best prepare for the uncertain short and long term future
More hurdles in the deal origination process. The primary intermediaries of many private market investment managers are bankers from investment banks like Moelis & Co., Houlihan Lowkey, Evercore, and the like. These outfits, and many like them, are currently facing mandatory work from home policies due to company policy changes in effect to keep employees safe from the spread of the virus, and state-issued mandatory shelter policies. Since this business is highly dependent on relationships, it will be difficult for private equity firms to continue to strengthen their relationships with key intermediaries due to travel restrictions and sheltering. This goes for other intermediaries like M&A consultants and lawyers as well, all who face the same hardships as investment banking firms during COVID-19.
Portfolio company performance and exit multiples will decrease. As mentioned, no company, public or private, is immune from the crushing economic pressures this pandemic is creating. Even those who are built and capitalized well enough to weather a storm will not be likely to meet the same barometers of performance that have been set from the outset or beginning of the year. Particularly for venture capital firms, this will be a critical exercise in the resilience of the founders that they’ve invested in to lead during times of crisis.
Intensified scrutiny over typical underwriting process. There are certain aspects on a private company’s balance sheet that an investment team can ignore to boost EBITDA which often results in the ability to lend more capital to targets and portfolios. These methods that would be considered par-for-the-course in Pre-Coronavirus times will likely see a higher level of scrutiny from investment committees.
Capital commitments will delay, or even fall through. Due to travel bans, mandatory shelters, and general fears of spreading the Coronavirus, it will be likely that limited partners will be less likely to prioritize meeting with new fund managers that are vying for their capital under management.
LP’s will be less likely to vote for extension. If a realized fund offering is up for extension, it’s possible that in a quest to maximize their liquidity, HNW individuals and family offices could vote “nay” for an extension. Depending on lock-up periods and penalties, some could even seek redemption earlier than anticipated.
Increased demand for reporting. Limited partners will likely want to understand the fundamentals of the portfolios that they’ve invested in as well as fund performance. It will be common for LPs to request reports and data, potentially in new formats, and private equity firms should be equipped to provide them with the data they need to provide their fiduciary responsibilities to their stakeholders.
Tying it all together
Make no mistake, many private equity and VC firms are primed to continue to perform, especially those with specialized investments in digital health, remote enterprise, and the at-home consumer. For PE and VC alike, dry powder and deal volume is at an all-time high, but future activity will likely take a big hit. At this point, it’s too early to determine the overall impact on private markets, but there are crisis-mitigation measures that these firms can start implementing today. Get in touch with us to learn how we’re working with private equity and venture capital firms to help them improve their COVID-19 continuity strategy.