Companies not affected — or even made better — by COVID shouldn't have any trouble attracting investment by private equity (PE) firms at relatively strong valuations. However, there is slightly less leverage available today, investment specialists said.
"We are seeing very minimal change in valuation," Steve Rodgers, managing director of Morgan Stanley Capital Partners, said in a webcast hosted by Dechert LLP. "The only companies that were impacted that are coming to the capital markets are those that really need to raise capital. So, those are going to be at distressed valuations."
Those that don't have to sell, said Rodgers, are smart to wait "until there's more clarity how [the economy] recovers."
Global merger and acquisition (M&A) deals so far this year are down 41% by value and 16% by number, said Markus Bolsinger, a partner with Dechert, citing Refinitiv data. PE-backed buyouts are down, too, 24% by value and 8% by deals.
For established firms with strong investor relationships, raising funds for dealmaking hasn't been a problem, said Suzanne Donohoe, a KKR partner.
Unlike in the 2008 crisis, investors are willing to "step into the breach," in part because of the opportunities they missed last time around, she said. "We found investors [have been] very willing to capitalize on this dislocation."
It also helps that the Federal Reserve, also unlike last time, has gone all out to ensure markets stay liquid.
Successful firms today are largely sticking to what they know and not trying to pivot quickly to unfamiliar territory because of the uncertain environment, the specialists said.
"We've avoided jumping on the flavor of the month," said Michael Delaney, managing partner of Court Square Capital Partners. He's seen PE firms in past downturns "kneejerk" into other forms of investing and that's not what he recommends. "We've not seen these strategies end well."
His firm just signed up a deal at roughly $250 million for a company that's largely been unaffected by COVID, but because the availability of leverage is down slightly, they had to put in more equity — $100 million — than they typically do, but that’s not seen as a major hurdle.
"Instead of $150 million in leverage, maybe we would have gotten $170 million earlier in the year," he said.
Like many PE firms, his has become more comfortable structuring financing in a way that serves as a bridge until conditions improve.
"If that means over-equitizing, so be it," he said. "Markets are going to come back at some point, and when they do, you'll be able to put in a more advantageous capital structure. It's not as big a deal as it was 20 years ago, when private equity firms were reluctant to bridge purchase prices by over-equitzing."
Also unlike in the past, many PE firms go into deals with the intent of staying in them to help improve operations for the long-term rather than to make a quick buck on the arbitrage at sale, Rodgers said.
"The best PE firms have really honed models based on making operational changes within the companies," he said, "by improving sales forces, pricing, procurement and operational efficiencies."
Waiting for recovery
The question hanging over everything, though, is when economies will recover.
Nothing is more important than vaccine development and distribution, Donohoe said. "Companies [will] go from temporarily impaired to permanently impaired if things don’t change," she said.
Another factor is the relationship between the United States and China, which are in an all-out cold war, said Cyrus Driver, managing director of the Partners Group in Singapore. "That has an impact on many economies that want to trade with both big blocs," he said.
The rise of China also poses a challenge because of the poor quality of data coming out of its markets. "We could run into a large China debt crisis without the visibility we have in the U.S. or Europe," Driver said.