SS&C has had virtual conversations with several leading private capital companies, limited partners and industry stakeholders to gain insight into how the coronavirus (COVID-19) pandemic is affecting them now and what they see coming next. In our first post in this series, we focused on high-level observations and predictions. In this post, we will drill down into the different investment strategies and how these strategies are affected by COVID-19 and government intervention.
Some firms with physical asset portfolio companies (e.g., food processing or consumer goods) are experiencing disruption to their supply chains. This disorder is impacting product distribution and sales in an environment that is already at a standstill and, in many cases, it will lead to working capital shortages. The implications of COVID-19 on global supply chains and the possibility of moving production closer to home (with the trade-off being lower profits) are looming large, though some of these changes had begun to occur before the onset of the present crisis. There is an expectation that the more archaic and inefficient supply chains will be replaced. Other companies who have invested in more recession-resistant businesses such as technology and business services are likely to fare better.
Many of the executives we spoke to believe that more proactive and responsive engagement from banks is essential. Banks need to manage investors’ on-credit appetite and related reserving requirements. Government guarantees around credit should help.
Sponsors are focusing efforts on those portfolio companies that need urgent support and corrective action, and on those that they feel can best survive this economic period. The industry in which the portfolio company operates has the most obvious bearing on its requirements and the necessary approach. At the same time, there could be exciting acquisition opportunities at attractive valuations down the road. More time is needed for the situation to stabilize and for a "new normal" to arrive before there is any meaningful resumption in M&A activity.
Private equity buyers can move quickly to acquire and close transactions, and we expect more streamlined due diligence processes leveraging more intelligent virtual data rooms to fuel this ability. Deals being carried out by financial buyers don't need to contend with lengthy and complicated anti-competition rules and approval processes. Furthermore, the industry is awash with dry powder built up during times when valuations were frothy. This estimated $2-2.5 trillion in dry powder will prove a useful slush fund to target and close attractive deals, though it will be time for the M&A markets to open up.
Firms with financial asset portfolios—credit funds—also see this situation as both a challenge and an opportunity. Downward pressure on holdings, mark to market implications, and the likelihood of redemptions/suspensions (for open-ended structures) all present a challenge.
On the other hand, the market displacement will eventually filter through to the credit side, presenting an opportunity. Banks are likely to offload increasing numbers of non-performing loan (NPL) portfolios, which offer decent acquisition opportunities for private equity firms. One firm we spoke to operates in the defeasance space; they take bank assets off the bank's balance sheets for some time, giving the bank some breathing room. The consensus is that it will take 12-18 months for these opportunities to materialize.
Firms investing in real estate expect a significant drop in transactions, and governmental measures to tackle the coronavirus pandemic may impact income streams. Tenants may need to negotiate rents, and the retail and the hospitality sector are the most impacted. Most firms we spoke to had adopted a "wait and see" approach with regards to how long they could expect the impact on real estate to last.
Government intervention also has a notable impact on portfolio companies' viability and sustainability. At the time, the aid package announced by the UK Chancellor was not yet operational, and many were planning to apply for assistance on behalf of their portfolio companies. There was uncertainty around how these measures would apply to private equity sponsored companies. The British Private Equity & Venture Capital Association (BVCA) is helping the industry understand some of the nuances and procedures, and is also acting as the industry voice in discussions with policymakers.
The fiscal measures announced by the European Union (EU) were somewhat eclipsed as each member country set about delivering its own budgetary response. Specifically, existing national welfare policies played a significant role in determining the starting point for additional stimulus. As Goldman Sachs opined at a recent webinar, there needs to be a more unified policy response across Europe.
Recent government intervention raises essential questions about the role of the state and citizens’ expectations. Both of these will likely shift in light of the economic impact of COVID-19, especially in countries where there has traditionally been widespread support of market-based principles.
The British Business Bank’s (BBB) Future Fund went live on May 20, 2020, with as many 500 applications on the first day. The UK government will match the amount an investor puts up—an example of the public-private partnerships that may become more common in the years ahead. This investor-led scheme means the lead investor applies on behalf of itself, the investee company and the other investors, and provides all information.
SS&C can help lenders put working capital in the hands of small businesses by leveraging artificial intelligence to digitize, expedite and automate the Coronavirus Business Interruption Loans Scheme. Please contact us for more information.
The SS&C Dialogues webinars discuss the impact of COVID-19 and the “new normal”—on consumer and investor behavior, the role of government and central banks, citizen expectations, and challenges and opportunities.
Alternative Investments, Asset Management, EMEA