Private equity firms must adapt quickly to coronavirus

Consultancy firm urges steps like workplace shifts, maintaining 'crucial machinery,' and weighing investment prospects

Private equity firms must adapt quickly to coronavirus

The past several weeks have been chaotic everywhere in the investing world as an unprecedented congregation of black swans threatens economies in both the West and the East. Traditional investments like stocks, bonds, and commodities have all been hit at once by coronavirus — and even a normally rarefied corner of alternative investing is getting affected.

Global consulting firm McKinsey has published an article offering advice to private equity firms and their portfolio companies as Covid-19 continues its rapid spread.

First and most important is to take care of employees and follow guidelines set out by public health organizations. McKinsey recognized that PE firms were investing in technology and back-office systems to let people work remotely from their residences. Firm leaders have to “role-model the emerging best practices and ensure their presence,” the consultancy said, as employees may need time and training to adjust to their new work conditions.

“The need to keep crucial machinery running” is also important, particularly by conducting video conferences to convene investment committees, assess the investment pipeline, and undertake other essential processes.

Third is the need to establish priorities within PE firms’ portfolios, particularly in order to determine whether a portfolio company needs support or “course correction.” The firm offered six indicators for PE firms to consider:

  • Risks to employees’ and customers’ health, safety, and productivity;
  • Financial/liquidity risk or customers seeking financing;
  • Geographic considerations;
  • Short-term revenue and delivery risks;
  • Longer-term risks and opportunities; and
  • Less tangible risks and opportunities

“Of course, the industry sector in which a portfolio company operates will be a strong determinant of how it will be affected,” the firm said. It noted that certain healthcare or retail companies must be maintained to support frontline virus responses or provide critical products and services.

Fourth, PE fund managers must evaluate their investment strategy, asset allocation, and financing. While sponsors with dry powder will likely find new potential investments in the upended markets, they must ask which ones are actionable, particularly as “obtaining debt finance for buyouts could be challenging.”

Finally, McKinsey stressed the importance of supporting investors and keeping stakeholders informed. Investing decisions should be viewed against the backdrop of the humanitarian crisis, including stepped-up commitments to ESG-related investments.

Some PE firms are already implementing at least one of these steps, according to the Wall Street Journal. Professionals at Apollo Global Management are reportedly conferencing with portfolio company managers every other day, while KKR has hired an infectious disease expert to act as a resource person to its portfolio companies with respect to the coronavirus pandemic.

The Journal also reported that executives at L.A.-based Leonard Green & Partners have decided to give US$10 million of their own money as emergency cash to employees of its affected portfolio companies.

“We want to support them and share the pain,” managing partner John Danhakl told the publication.


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