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Private Capital Themes

How PE Firms Are Approaching Investments during covid-19 Pandemic


M&A Associate

The coronavirus pandemic is causing widespread concern and economic hardship for consumers, businesses, and communities across the globe. The economic damage is becoming palpable. Private Equity firms and their portfolio companies come into the crisis riding a decade-long wave of growing transaction volumes, valuations, and fundraising.[1]

At the start of February, data from Preqin and Dealogic suggested that across funds dedicated to buyouts, venture capital, infrastructure, real estate, and distressed funds, Private Equity had more than $2 trillion of dry powder. The guardians of these large pools of private capital are sitting on a lot of it. If governments can hold societies and economies together, for now, central banks protect financial systems and their portfolio

companies survive, then these private cash buyers will be big drivers of whatever happens next.[2]

For fund managers in the investment cycle, there is a significant opportunity to capitalize on the market instability and lower valuations. The negotiation, documentation, and electronic due diligence of investments can and should continue to the extent possible. We expect substantial movement in pricing and terms even as deals are being finalized so fund managers should be alert and quick to respond.

The current financial market displacement and equity valuations have undoubtedly created potential investments for sponsors with dry powder. Many sponsors are preparing for a broader range of investments such as debt or other rescue financings for companies suffering the brunt of the crisis and other situations that are outside the norm. Such an investment strategy will require an agile process in order to move quickly when potential investments arise. The current pandemic has proven that black-swan scenarios exist. Thus, investors would do well to consider a wider range of disruptive scenarios when considering new investments.

According to Bain, looking across all fund types for general partners and limited partners, uncalled capital which has been rising since 2012, had hit $2.5 trillion by the end of 2019.[3] Private equity has never been so cash-rich and assets have rarely been so cheap meaning that vast fortunes are going to be made by those who best take advantage of this extraordinary combination. Perhaps, during this period, it’s surprising to hear that there is still an appetite to lend. These large private pools of capital are now presenting themselves to companies as potential providers of investment right across the capital structure. During this period, they are able to evaluate changing situations quickly and take minority stakes, buy hybrid instruments, provide straight debt, and even credit lines. They, therefore, present themselves as a potential solution for companies under stress and uncertainty.

What private equity is looking at right now is underlying assets in resilient sectors that either have no or limited exposure to coronaviruses such as technology, business services, and software. There will be a premium for stability overgrowth in the months ahead. It will be some time yet before the bargain hunters are searching for opportunities in manufacturing industries with complex international supply chains. Even investors with bags of cash can only focus on acquisitions they can take a calculated gamble on. And even if they are prepared to stretch, the credit investors they depend on won’t accept uncertainty. They will only finance resilient assets in the first phase of any stabilization and recovery.

For funds in the capital-raising cycle, the pandemic may prove to be tough and challenging. We are already seeing investors delaying or reducing commitments as they try to assess the economic fallout on their own balance sheets. Fund managers must be prepared to address these concerns and to redirect attention to the long-term nature of their investments and to investment opportunities that will ultimately arise from the crisis. [4]

Fund managers will not be able to meet with prospective investors in person for the next few months or traverse the conference circuit for new sources of capital. While it is not ideal to conduct these discussions without the usual social interaction, fund managers need to adapt quickly. It is an opportunity to have a captive audience and fund managers can stay in touch with prospective investors with interactive discussions and topics of interest. It may not be possible to get a firm commitment during the global lockdowns, but it is possible to impress prospective investors with insights and foresight and to be ready to capitalize on opportunities as soon as the restrictions lift.

The implications of Covid-19 are changing with each passing week and fund managers need to be nimble and seize opportunities as they present themselves. Those that are best prepared and quickest to act decisively to protect the interests of their investors and portfolio companies will be the ones that emerge strongest from this crisis.


[1] Private Equity and the new Reality of Coronavirus- McKinsey & Company

[2] Private Equity can be the big winner from Covid-19 sell-off- Euromoney

[3] Global Private Equity Report 2020- Bain & Company

[4] How coronavirus is affecting private equity- Private Equity International

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