How has coronavirus impacted the private equity market?

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. 

Getting investment from private equity funds

However, there are a wide variety of private equity funds pursuing a variety of strategies and some private equity funds focus on turnaround investment and special situations. They specialise in evaluating and pricing companies in deteriorating markets, structural decline and/or in need of complex / expensive restructuring. These situations have a different risk profile to acquiring a profitable business and these funds mitigate much of that risk by paying a low valuation and taking a controlling stake so they can dictate the changes needed in the company. Investors with strategies like this will be particularly active over the coming months as some companies run out of cash. These funds provide vital capital to keep businesses running, save jobs and avoid bankruptcies when other avenues of investment are exhausted, however, they rarely offer a return for shareholders. 

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

Charlie Jolly Charlie Jolly

Partner, Head of Private Equity Coverage

Kirst Sandwell Kirsty Sandwell

Partner

Stuart Clowser Stuart Clowser

Partner