Private equity investors face a feeding frenzy for companies unaffected or even buoyed by the pandemic. Many are targeting different kinds of companies for potential deals, investment specialists said this week in a podcast by global advisory firm Dechert LLP.
First on their wish list: the well-run company that has largely survived the pandemic but whose equity sponsors consider 2020 a lost year in terms of growth.
These companies "want to find ways to make that up," said Jasvinder Khaira, Blackstone senior managing director and partner. "That will happen either through putting the gas on acquisitions, or doing something more aggressive, from a capital plan," either of which would require an equity infusion.
Also on investors' wish list: well-run companies struggling to survive a demand shock from the pandemic and nearing an end to their cash flow.
"These are good businesses, but [with] anywhere from zero to 50% of normal revenues and need either structured equity or structured debt to enable them to see it through 2021, 2022," Khaira said.
The good news — there is a lot of untapped private equity capital on the sidelines waiting to be invested in the right companies, said Emilio Pedroni, First Atlantic Capital managing director.
They're "hungry to get deals done," he said.
Well-run companies whose business model is largely unaffected by the pandemic can probably command a price close to what they could have before the pandemic, said Anna Siakotos, deputy general counsel at Cerberus Capital Management. But they face tough negotiations over terms that remain affected by the pandemic. "Seller friendly terms no longer apply," she said.
Negotiations can get heated when it comes to hashing out the terms of reps and warranties, Siakotos said. "Sellers want the blanket carve-outs with anything to do with the pandemic, but buyers obviously want the control," she added. "The W&I [warranty and indemnity insurance] remains the horse lurking around what they will and will not support."
No rush to exit
The idea that sponsors are rushing to exit companies before the November presidential election is an urban myth, Siakotos said.
"I don't know who created that; [probably] somebody who wants to bolster activity," she said.
The rumor making the rounds is that a change in administration will usher in a big tax hike, but that prospect is unlikely to fuel hasty decisions.
"Even if there's a change in the White House, it would take months before any changes could be enacted," she said. "And who can tell what the world will look like in 12 months time?"
Both for deal due diligence and post-deal integration, pandemic-related travel restrictions have created a challenging environment, but, by themselves they're not standing in the way of work getting done, the specialists said.
For face-to-face meetings, buyers are tapping their networks to have local analysts stand in for them.
"Where we don't have offices or consultants, we try to rely on people we know from previous relationships," Siokotos said. "Their eyes can be our eyes. Some of the markets in Europe are already open. People can meet there."
Where in-person meetings aren't possible, video calls work.
"I will tell you, [compared to] a conversation with a mask six feet apart, you're probably better off on Zoom," said Khaira, who recently had an in-person meeting to work on integration of an acquisition. "I probably understood every third word."