Private equity, like virtually every market and industry, has been affected by the coronavirus pandemic and, like many other markets and industries, the total effect of the pandemic remains unknown. Private equity has historically behaved like a GDP-linked business: as consumer spending and business investment decline, so does the volume of private equity transactions. As a result of this behavior, the pandemic creates continued uncertainty for private equity, but it also presents strategic opportunities to firms that have cash or the ability to call cash.
Current Status of Private Equity Deals
Unlike some industries that have come to a screeching halt, private equity deals are still moving, albeit at a slower pace. Many deals that were, or are. set to close during this shutdown period are still expected to close. In addition, many deals that were in final stages of negotiation when the shutdown began are still being signed.
However, we are seeing private equity deals that were not in the final stages of negotiation either being significantly slowed or completely stopped until the market stabilizes. Clients have begun taking all necessary defensive measures to brace for the potential impact of the virus. Many companies are drawing down on their sources of financing in order to put as much money on the balance sheet as possible during this time. It has been reported that certain large private equity firms, including The Blackstone Group Inc. and Carlyle Group Inc., have specifically called on their portfolio companies to use their credit lines.
With an emphasis on cash on hand, many private equity firms that were considering acquisitions are instead holding onto their cash in order to maintain liquidity to weather the storm. Further, companies that were considering a sale process are likely to hold off on such a sale until the market is able to rebound. For example, Italy’s Piaggio Aerospace postponed its May 4 deadline to submit expressions of interest for the company due to the coronavirus pandemic and Thoma Bravo, citing market volatility due to the spread of the coronavirus, canceled its auction for healthcare security company Imprivata.
Private Equity Firms with Cash On Hand
While many portfolio companies and private equity firms will be struggling and trying to weather the storm during this pandemic, a number of private equity firms have a significant amount of cash on hand and committed capital at their disposal and are eyeing these circumstances as a prime opportunity to invest. As acquisition prices and company valuations have steadily increased over recent years (median buyout multiples in the United States increased from 9.3x in 2015 to steadily over 12x in 2019)1, many firms have been accumulating a record amount of cash and committed capital—the private equity sector has between $1.5 trillion and $2.4 trillion in cash and committed capital, or “dry powder,” depending on varying reports.
With an excess of dry powder, the industry could experience a flurry of transactions by private equity firms that have access to cash, especially in those industries hit hardest by the pandemic, such as the entertainment, restaurant, and travel industries. According to Bloomberg, Apollo Global Management, a private-equity firm that often has invested in the restaurant business, is currently tracking more than 250 distressed assets as potential investment opportunities. Many bankers in the industry expect the initial transactions to be investments to help cash-strapped companies as opposed to full-scale takeovers.
This prediction of a flurry of activity by cash-heavy firms is further bolstered by the difficulty for private equity firms to gain access to funding under the $2 trillion coronavirus stimulus package passed by Congress. According to The Wall Street Journal, private equity-owned businesses are not explicitly barred from receiving assistance, but many will find it a challenge to unlock aid due to the government’s lending requirement. The current legislation includes $350 billion in small-business loans for companies with fewer than 500 employees. However, private equity-owned companies may be considered “affiliated” with all of the other portfolio companies of their private equity sponsor. If the affiliation rules are applied in this way, the total number of all employees of all portfolio companies of a fund or affiliated group of funds would be used to determine whether each individual company falls under the 500-employee threshold. This would lend additional leverage to the private equity firms that currently have access to cash and are looking for potential companies with deflated valuations that are in need of cash flow assistance.Overall, the private equity market is in a state of uncertainty, but even with this uncertainty, there still will be significant opportunities for private equity firms to continue to grow their portfolios and minimize the long-term risk and losses from this current economic downtown through strategic transactions.
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