Finance

Private Equity Portfolio Companies Operations Amid COVID-19

Given the seriousness of COVID-19, the portfolio companies of private equity are facing various challenges. Here is how they can overcome them with planning and actions.

The private equity industry is the busiest one managing through the COVID-19 crisis. It has made multibillionaires like Steve Schwarzman, Black Stone ($7.5 bn), and Leon Black, Apollo ($7.5 bn), and continues to win even during the crisis.

They are driving the company cash flow, operational threats, and planning the next merger and acquisition transaction. According to Pitchbook reports, the big five public-private equity firms like Blackstone, KKR, Apollo, The Carlyle Group, and Ares fared well in Q1.

The Q1 findings show that the –

  • Cash produced from management and other fees are up year-over-year for managers
  • GPs are boosting assets by holding onto capital
  • Fee-related earnings are supporting management companies

Facebook acquired GIF-sharing platform provider Giphy, the latest in the stream of M&A activity and investments. It joined Apple, Amazon, and Microsoft while setting the highest level of the quarterly deal-making. The lawmakers and regulators are continuing their scrutinization on big tech during the pandemic.

Let us focus on the key considerations for managing portfolio company operations through COVID-19.

Re-Evaluation of Forecasts:

The private equity professionals like Analysts and Associates ate reworking models and forecasts. They are hypersensitive to forecasts and releasing it in short durations like three-, six-, and 12-month periods. The updated forecasts might affect the decisions on –

  • Operations
  • Capital investments
  • Exit strategies

However, smart businesses are already evaluating their revenue and expenses by using updated technologies like real-time cash flow dashboards.

Guidance for compliance:

It is a welcoming aspect that the businesses are gearing up to fight COVID-19. They are forming crisis teams comprising of C-level suite, council members, financial advisors, outside advisors, and many more. Still, we do find several companies struggling to comply with COVID-19. A few of them are working with attorneys.

Regular communications and negotiations with vendors are becoming the top priority to assess weaknesses and consider the best alternatives. Though companies can claim for losses through insurance, it is crucial to consider the measuring techniques in support of claims.

Concerns for cybersecurity:

COVID-19 has pushed the employees to stay at home and work at home. This has brought an influx of cyberattacks as none of us prepared for this situation. Though the attacks are not new, employees are not advised on many issues. It is a critical point of time to educate their employees.

Henceforth, companies are making guidelines to prevent campaigns and process attacks when people are working from home.

Risk assessment of Portfolio companies:

To navigate the uncertainty prevailing due to coronavirus outbreak, PE firms must model the impact scenarios and determine the signposts signaling new developments. It is critical to identify the pressing challenges and allow the firm to direct its resources toward the portfolio companies with the most immediate issues.

The portfolio company’s vulnerability can be based on four areas like reduced demand, supply chain, operational interruptions, workforce issues, and financial stability.

Customization of Agenda:

Though companies share similar risks, the plans cannot be the same. There is a necessity to identify the set of initiatives for each portfolio company. an execution roadmap is crucial to mobilize the resources, project staff, or hire outside expertise. Also, structured learning must get established continuously to have a consistent follow up on initiatives, and share best practices.

To summarize…

The coronavirus outbreak has posed a myriad of issues for each industry, company across the global economy. However, the challenges faced by private equity are unique and the range of risks is complex as the portfolio companies span around a number of industries and geographies.

Generalized solutions will not contribute any value, because the global crisis affects the portfolio companies in a different way altogether.

A practical plan to assess risk, customizing solutions, prioritizing actions, and its quick execution will win the show.

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