Article written by:
Director of Transaction Advisory Services &
GBQ’s Chief Liaison to Footprint Capital
First, I hope everyone is coping with the new realities of life and staying safe and healthy.
My heart goes out to those most affected. I have a brother-in-law who was hospitalized in Connecticut with COVID-19. When it gets down to matters of life and death, it gets very real. Fortunately, he was discharged from the hospital last Friday and is recovering.
Dealing with priorities.
As to businesses, the #1 concern right now is the safety of workers with the concern of liquidity close behind. Managing working capital and taking advantage of the CARES Act is getting maximum attention. There is a lot of fear out there right now, along with a lot of pain, but we must rise above the fear and make plans to get through this. We must stay in the game.
As one PE CEO put it, “The virus is consuming all the oxygen.”
Hitting pause: deals are happening, just more slowly.
This is what we have been hearing universally. Throughout the past month, we have been fortunate to have one deal close and a few LOIs signed, but now the majority of deals not in LOI are being delayed over concerns of the virus, structural issues around diligence and valuations being questioned. Volatility, just like in the stock market, is making it harder to know what the right value should be for a company.
Various deal observations.
- While the Feds have stepped up to the plate in a huge and unprecedented way, we all know the recovery will be slow with many twists and turns along the way.
- Ongoing disruptions in the supply chain will slow down the recovery.
- Companies in healthcare, technology and safety will have a big advantage in the future.
- While I hesitate to even say it, there will be opportunities to invest in distressed companies just like there will be opportunities to strategically invest in stocks in the public markets. New partnerships and joint ventures will be made.
- Most of the deals being done, and will be done in the near term, are in industries that are deemed “recession-resistant” and are considered “essential” by current definitions.
- PE firms have an estimated $1 trillion of dry powder to deploy so they will not be on the sidelines for long. In the short run, they may have a tendency to focus more on add-on acquisitions to support their existing portfolio companies. In this regard, they are making acquisitions in a manner more similar to strategic buyers. Strategic buyers will also continue their expansion plans through acquisitions, albeit slower.
- Deals will also be slowed by what is going on with other deal participants like banks, CPA firms, insurance companies, and attorneys who typically support the deal world, however are presently distracted with pressing client matters around the CARES Act and other COVID-19 issues.
- As to the future, what is going on right now with COVID-19 will accelerate changes that were going to happen over time anyway. For example, anything new that promotes being able to work from home will be accelerated. There are several other examples we can imagine.
- There are some sectors where deals will occur, and valuations will be similar to “pre-COVID-19.” Companies with recurring revenues, especially companies that are considered “essential”, will still be very popular. Some industrial businesses that are considered “essential” will also be favored.
Summary of a recent survey of PE firms conducted by BDO Seidman prior to the COVID-19 pandemic.
Top 5 findings:
- 72% were already preparing for a downturn.
- Technology was the #1 leading sector for investments, specifically those focusing on productivity, mobility and remote workers.
- In the technology space, 5G was the leading investment sector, even ahead of AI and robotics.
- Trade deals were the biggest concern for PEs.
- Digital potential within companies was important to PE firms in making their decisions to buy companies.
Short-run impacts to PE firms:
- Delays in fundraising
- Cheaper debt available
- EBITDA impacts
- Slowdown in deals
- Delays in closing deals
- Workforce shortages
- Foundational disruptions to deals in progress
Short-term concerns of PE firms:
- Portfolio management
- Meeting financial covenants
- Dealing with business interruption insurance
Medium-term concerns of PE firms:
- Recession-proofing portfolios
- Business resilience investments
- Distressed operations
Baby Boomers will still need to seek liquidity and exit their businesses.
Deals are still being done and will continue to be done. Diligence will be much stronger than in the past and will take into consideration all the risks that the current environment has introduced.
Values for the right businesses will still be strong, especially, with interest rates at historic lows. While valuations have been high for so long, they came down with a dramatic drop in some cases and are now looking to slowly regain their footing. While good businesses may have experienced a major setback, for the most part, their long-term value will recover and remain intact.
We are pleased to provide a link to our COVID-19 Resources webpage where you can find a number of articles and webinars available to you as you continue to strategize on next steps and keep current with the ever-changing conditions. As the COVID-19 pandemic continues to present challenges and disruptions, GBQ’s commitment to empowering growth remains our top priority.
Should you have questions about your situation and next steps, we are here to listen and assist.