Private equity’s five-step playbook for weathering coronavirus

McKinsey has issued guidance for the industry as it faces business disruption

Private equity firms and the companies they invest in need to adjust quickly to the “new reality” of the coronavirus, according to McKinsey.

Its guidance comes as the rapid spread of Covid-19 is disrupting economies around the world and government strategies for dealing with the pandemic include asking people to work from home. This creates new challenges for companies and their employees, particularly in sectors such as private equity, where deals are struck through face-to-face meetings.

The consulting firm’s article details five steps private equity firms and their portfolio companies should undertake.

The first, it says, is that companies take care of their employees and follow the guidelines set out by public health organisations. McKinsey noted that private equity firms were investing in improving the necessary technology and back-office structures to allow people to work from home.

Employees may need training to get comfortable with the new way of working, McKinsey says. “Firm leaders need to role-model the emerging best practices and ensure their presence (through videoconferences or more frequent informal calls) to maintain both organisational connectedness and ongoing critical activities.”

The guide also stresses that private equity firms need to keep the “crucial machinery running” by continuing to assess the investment pipeline, carry out investment-committee discussions and conduct other essential processes through video conferences.

Third, a private equity company’s portfolio must be prioritised. McKinsey has included a checklist of six indicators of disproportionate risk or impact, which can help a company identify which of its investments require more support. These include risks to employees’ and customers’ health, and geographic considerations such as where suppliers are based.

“Of course, the industry sector in which a portfolio company operates will be a strong determinant of how it will be affected,” the consultancy says.

Next is assessing their investment strategy, asset allocation and financing. McKinsey says: “The current financial-market displacement and equity valuations have undoubtedly created potential investments for sponsors with dry powder [cash to spend]. It is difficult to determine which of these will be actionable, not least because obtaining debt finance for buyouts could be challenging.”

It adds: “Covid-19 has proved again that black swans exist. Investors would do well to consider a wider range of disruptive scenarios when considering new investments.”

Lastly, the playbook points to the importance of supporting investors and keeping stakeholders informed. It says firms should also consider their investments in light of the humanitarian crisis, including increasing their commitments to ethical, social and governance-related investments.

McKinsey adds that, as the economy recovers, portfolio companies should be prepared for mergers and acquisitions. “McKinsey research shows that public companies that outperformed coming out of the last recession divested underperforming businesses faster than others did and made acquisitions earlier in the recovery phase.”

Source: Financial News

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