Navigating COVID-19: The Private Equity Funding Environment

21 Apr 2020

Although it’s too soon to be talking about a return to anything remotely normal, we are starting to see some positive signs from private equity investors. Following an initial period of impact assessment and portfolio planning, a number of our conversations have turned to the future. Whilst unlike any downturn on record, the hands-on approach to investment should see well capitalised PE backed businesses thrive in a post COVID-19 world.


Ultimately, private equity is a highly resilient and flexible asset class, with almost £80bn being raised by UK based mid-market funds in the last three years alone. Much of this capital will still need to be deployed and the way that businesses respond to the current crisis will be a key factor for any future investment decision.


1. Portfolio is key in the short term.

Stabilisation is underway, and it won’t be long before investors’ focus turns back to growth. We expect bolt on acquisitions will be viewed as a low risk but potentially high return way to deploy capital as investors look to back their high-performing management teams.

Potential synergies and cost savings that can be achieved will also help the investment case against a backdrop of uncertainty around valuations and short-term COVID-19 impacts.


2. Platform investments will come… eventually.

Primary management buyout deals are likely to be a focus in the short to medium term, as secondary deals involving selling private equity are moved out to the right to enable minimum returns thresholds to be met.

Funds that can be closed out may still see some exits, but overall, if there is no pressure to sell we expect hold times for many existing investments to extend on the back of COVID-19.


3. Public to private deals are on the agenda for many.

There are clear areas of value on public markets where prices have fallen, sometimes dramatically before some modest recovery in recent days. The journey back for many small-cap listed companies will be hard.

We have seen a notable increase in appetite from PE to explore taking business off the market. Some listed businesses will inevitably see the opportunity to tap into additional capital and execute their post COVID-19 recovery plans away from the public gaze. Having advised on 4 take privates in the last year, we only expect this trend to continue.


4. Digital focused and recurring revenue models will flourish.

The global shut down we have seen in recent weeks will result in more value being placed on businesses that can continue to generate revenue without a physical presence or that can facilitate digital transformation.

The key factor for most PE managers when making an investment decision will be quality of management teams – investors like to get to know the people they are backing, which takes time and face to face interaction. Whilst lock down is in full swing, we think it’s unlikely that many new deals will get completed, however, that doesn’t mean that time should not be spent laying the groundwork for future investment.


For advice on whether investment from private equity is appropriate for your business, or to explore funding opportunities across any source of capital please contact the team.

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