As corporates have sought additional capital to survive the pandemic, this has created opportunity for private equity firms to invest in businesses they believe to be fundamentally sound.
This FT article highlights the varying strategies different private equity houses are taking. Whilst the approaches may vary, the common theme is that private equity has been busy positioning itself to capture value as the world adapts to the impact of COVID.
The signs of economic recovery are linked to solving the health crisis which continues to evolve and is having varying impacts in different geographies and sectors. The uncertainty of the health crisis means corporates must remain operationally nimble to react to the constantly changing COVID dynamics within different parts of the world.
As lockdown measures have been relaxed, we have started to see pent up demand released in some areas such as retail and hospitality. When this is overlaid with the virtual world of Zoom calls and people's increasing desire for flexibility, it is still not clear what the long term impact of COVID on the new normal economy will be for many sectors. Will business travel return to pre-pandemic levels? Will flexible working be a sustainable change?
The only thing that seems to be certain is that businesses need to get used to operating in greater levels of uncertainty.
So what does this mean for private equity backed businesses?
Combining both the operational challenges with the economic and social uncertainty means that recovery may not be linear and there is a risk that private equity may need to inject additional liquidity into its investments to ensure they can survive through to a post-COVID world, potentially increasing debt levels and therefore the hurdle rate for required returns.
There is also going to be an ever-increasing focus on leadership, liquidity and performance, particularly in private equity backed businesses. Where these businesses have not had a private equity owner before, this level of attention will likely be another challenge for management teams to overcome - alongside the many challenges they already face - as their new investors will want to ensure that these businesses are well managed and well positioned for recovery to maximise the return on their investment - in whatever time horizon that COVID allows.