The top priority for all private equity funds is to protect and maximise value in their existing investments. All private equity firms with existing investments will be assessing the outlook for each company and deciding what level of action to take in each case. They have a range of options:
- invest further equity capital into the businesses to shore up the balance sheet and / or prepare to make opportunistic acquisitions;
- engage with lenders to the company to increase or extend facilities; or
- taking no action - the company is healthy or so impaired that all value is unrecoverable.
The majority of UK private equity funds acquire stakes in profitable, growing businesses and in an environment where most businesses are no longer growing and many are not profitable, that majority of private equity firms will not make new investments. Deal volumes have plummeted while most private equity firms take stock of the situation and work to support their existing investments.
Implications of coronavirus for private equity firms
In the short term, investors in private equity funds (mostly insurance companies, pension and sovereign wealth funds) will dramatically scale back their commitments to new funds as their overall investment portfolios are impacted, broadly in line with public markets. Consequently, private equity firms raising new funds will look to delay these plans and those that were working towards imminent fund closings will likely be delayed. The best funds will retain the ability raise new money but new managers and firms that need to attract new investors will have to compete fiercely for a greatly reduced number of investors increasing their private equity exposure. This scarcity of capital will lead to fewer successful fundraisings in the short term. This difficult period for private equity firms comes with a silver lining in that funds invested in this market are likely to make strong returns – so those few investors that are able to commit to new private equity funds are likely to do well.
For more information, please contact