Global private equity firms are facing the brunt of coronavirus outbreaks. Answering 5 dilemmas facing top private equity firms, here’s some food for thought for the best private equity consulting firms.
The private Equity industry, like others, is facing uncertainties of the adverse effects of novel coronavirus outbreaks.
Investment sectors like lodging and airline have been hit much harder. Portfolio companies dealing in these sectors or are in the mid of COVID-19 hotspots are struggling with the fallouts. The volatility index is at an all-time high. Goldman Sachs revised its growth forecast for S&P to zero for the entire 2020.
Public markets are expected to continue exhibiting high volatility until some clarity is reached about the impact of coronavirus on the economy.
While deals, meetings, and fundraising are on pause, the best private equity consulting firms have figured a fillip side to the story (see first answer).
The private Equity Industry answers 5 vital questions around the coronavirus outbreaks and their impact on even the best private equity consulting firms.
- What is the effect of pandemic on private equity AUM growth?
The virtue of private equity is it can withstand short-term fallouts and volatility in favor of the long-term.
Without a doubt, current AUM growth is adversely impacted. However, this is the time industry should leverage its power of long-term investments.
The start of 2020 revealed global private equity firms has over $2 trillion of dry power – money raised in large funding rounds.
The bear market panic has put depressed acceptance of lower valuations, and the vast pool of capital can be put to work in the M&A market, buyouts of established companies, supporting growth of potential companies, real estate funds. Furthermore, global decline in interest rates and cap rates can be favorable for real estate investments (keep a watch out for Net Operating Income).
- How can PE firms manage portfolios amid volatile economy?
The significant shakeup is yet to come.
As professionals in private equity jobs face the brunt of declining portfolio values and teed-off investors, they must know the solidness of the market is yet to undergo a test from the COVID-19 outbreak as it spreads.
Revenue, profitability, and cash positions of the portfolio companies will and perhaps already are impacted.
All you can do is prepare your bolt-outs and portfolios. Stepping up procedures to constantly monitor virus impact, and forecast the near future impact can help, especially those exposed to transport and tourism-related industries, or China and other countries, which are badly hit by the outbreak.
- How the future looks for Private Equity Associations?
Until some semblance – cure or successful halting – is achieved for the outbreak, anything is hard to say. That said, taking a long-term view can help the business running.
Prepare your existing and future portfolios in a manner that positions them to withstand these crises. It will pass, but we can’t know or make guess how bad it is going to make the markets before calm returns.
Beyond this, you can’t expect to always react after the crisis but have to ready yourself to react way before.
- How can PE industry go about fundraising and investment activities?
Given travel restrictions and other logistical issues, firms seeking to raise funds can adopt two approaches.
Given high market volatility, it is likely that credit investors may also take on a conservative approach by opting for their pre-existing private credit managers instead of adding new ones to manage their portfolios. Global private equity firms can approach their old investors for fundraising.
To find new collaborators, you can make use of conference calls and remote communication. However, with new investors, it can be extremely difficult to land a deal without face-to-face meetings. Unless your reputation precedes you.
- Any special steps to abate industry impact of COVID-19?
Keep a close watch on what your peers are doing.
One of the top private equity firms has come up with a novel idea for novel coronavirus.
It is giving loan deals that give the option to borrowers to add losses from non-recurring events to be added to earnings. The firm is offering it to middle-market deals. Though there are investor-related fallouts to this, the provision is inviting interested borrowers like bees to honey.
Innovating novel ways to expand and diversify resources can work well for PE firms and deliver a satisfactory AUM universe and growth.
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