Covid-19 impact on Private Equity firms and its portfolio companies

Covid-19 impact on Private Equity firms

There has been a significant Covid-19 impact on Private Equity firms. As quickly as the Covid-19 crisis is loosening, managers of private equity firms have to move more rapidly.

While it is difficult to assess the outbreak’s terminal consequence, efforts to check the virus have now ground broad swaths of economic activity to a standstill, causing far-reaching ripple effects across global financial and consumer markets.

By now, most firms have established an emergency response team, have executed steps to take care of their people, and are communicating with investors. They are giving more and more consideration to ascertaining the outbreak’s possible impact on portfolio companies and forming a clear, resolute action plan to alleviate the damage.

The Covid-19 impact strikes every portfolio company uniquely, needing a tailored program for each. Tactics, including aggressively maintaining working capital, might serve across the portfolio. However, those are table stakes, not strategies.

The real issue is what to do next. Given insufficient time and resources, it is necessary to triage portfolio companies by recognizing the most urgent threats and outlining absolute priorities. Fund administrators need a quick and reasonable approach to:

  • Estimate particular risks to individual portfolio companies;
  • Prioritize businesses with the highest potential to influence fund performance; and
  • Generate a customized action plan for every priority corporation.

Evaluating portfolio company risk

To steer the writhing uncertainty bestowed by the coronavirus outbreak, PE firms should begin by creating the possible impact scenarios and discovering the signposts that will indicate new developments. Firms then can perform a quick risk estimation of each portfolio company in light of those evolving situations. Situations will vary based on everything from geography to government reply. What’s crucial is to recognize the most critical hurdles first, enabling the firm to focus its limited time and resources to the companies with the most pressing and significant concerns.

The fund managers need to swiftly assess each portfolio company’s vulnerability based on four spheres of possible exposure: decreased demand, supply chain or operational gaps, workforce concerns, and financial confidence.

A consistent evaluation process makes forming a response as honest as possible. Using the outcomes, firms can plot portfolio companies on a matrix based on how serious risk each encounters, whether that risk is addressable and how much value is at stake for the capital. By regulating companies in this method, firms can develop an action plan that drives more energy and resources to portfolio companies with the greatest vulnerability and the highest controllable value.

Developing a customized program

A sound and customized plan identify a tactical kit of actions the company can begin quickly. For every prioritized portfolio company, it sets out a phased execution roadmap that gathers the resources―Capex doses, project personnel, and outside expertise―these crucial initiatives need. The most efficient firms also set a structure for learning, continuously following up on activities and sharing the most useful practices across the portfolio.

While several companies may share related risks, no two plans will look identical. 

For instance, let us take the case of an IT services company that generates a part of its revenues by providing digital services and the majority of its revenues from its SaaS bases offerings. While a complete clampdown in many states is no less frightening for the leadership of this company, it has more time to develop a response. That’s because its products are essential for customers and produce a recurring stream of expected revenue. Like any business in this situation, this one has to struggle to make sure its employees are secure. Yet even that is made more convenient by the fact that many of them operate remotely already.

The software company’s prominent concern is what occurs as the virus-related economic disturbance widens and intensifies. While a SaaS model produces revenue flexibility, businesses grappling to stay open will ultimately ask for assistance or discontinue paying. The highest priority, then, is to devise a strategy to support these customers endure the storm while intensifying the company’s relationship with them.

That application should begin with an evaluation of the company’s financial position. How much commercial space does it have to extend customers’ relief? The subsequent step is to appraise the impact of the Covid-19 crisis on crucial customers. By layering on an examination of the company’s engagement with those customers (deal in the pipeline, renewal expected, no current project), sales leadership can chart out a customer-by-customer route forward and extend made-to-measure win-win solutions. 

The COVID-19 outbreak poses multiple complex issues for each industry, company across the global economy. What presents the private equity trial uniquely complex is the extent of risks given by a complex portfolio of companies traversing diverse industries and geographies. Generalized playbooks don’t supplement much value at a time when a global crisis hits each portfolio company uniquely. What’s crucial is generating a reasonable method to estimate risk, prioritize action, and effect quickly.


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