Under normal circumstances, M&A demands a robust set of tools and services to be successful. In today’s environment in which the stakes have been raised by the coronavirus crisis, professional help from service providers is more important than ever.
Private equity firms and their portfolio companies want to know what actions they can or should take, and what their peers are considering, to make the best decisions possible in response to the Covid-19 pandemic. Through talking with many different affected parties, service providers have streams of data and information that can help investors make informed decisions and minimize negative economic impacts on their investments.
“The stakes are high today,” says Greg Mansur, chief client officer at EHE Health, which provides a playbook on getting companies back to work safely. “We want to be part of the solution for our clients. We want to help them through this and help America get back to work.”
Mergers & Acquisitions has put together a list of five service providers that can help dealmakers through this unprecedented time.
Office of the future
Getting staff back to work at the private equity firm and portfolio company isn’t going to be easy. EHE Health, a healthcare provider focused on preventive care, has turned its attention to helping clients figure out how to get their staffs back to work safely.
Some of the key questions facing employers are when, where and how do they bring employees back to work, safely, how can publicly-available data be used to determine when and where it is safe to bring employees back to work, once back to work, how does an employer sustain operations of a safe work environment to prevent another shutdown?
“When it comes to getting back to work, everyone is learning together,” Mansur says. “Employers need to pay to attention to all the different details and everyone has unique circumstances so there’s no off-the-shelf solutions. The answer is different, but the question is the same: What will it take to get ourselves back to work? Some best practices are emerging.”
EHE has put together a guide for employers to help get employees back to work and staying healthy. The first phase is assessment and customization. Assessment includes an assessment of inventory or worksite locations, developing work-site specific epidemic risk scoring profiles and doing a site-based readiness analysis. The customization part includes communication, training, planning, preparation and intervention protocols to address Covid-19 exposures. The next phase is communication and execution. This phase involves examination components including health questionnaires, physical examinations, lab test and point of care Covid-19 test and real time clinical summary the goes directly to the employer. The last phase requires management and monitoring, which is an ongoing task.
The phases are crucial, according to EHE, and they should be followed along with the guidance of the U.S. Centers for Disease Control and Prevention and the U.S. Occupational Safety and Health Administration for a “holistic approach.”
It’s important to base decisions on objective information and sound public health tactics, Mansur says. EHE is rolling out a test that will enable employers to identify rapidly occurring infections in people who don’t yet have symptoms, as well as antibodies. Questionnaires and temperature checks are good measures, but they are not perfect solutions because the virus can circulate in people who don’t show symptoms of illness, he says.
EHE also offers a management dashboard that will track, manage and execute its safe-at-work playbook. The dashboard will track exam outcomes, quarantines and clear statuses, and analyze data by metrics unique to each employer, including location, department, manager and organizational role. It will also incorporate real-time updates from lab results and data reported from worksite screenings, such as out sick, high temp, newly quarantined, confirmed Covid-19 or recovered.
“There are multiple layers such as monitoring contractors who come in and out, visitors, deliveries, who can and should work remotely. There is a lot to think through and execute on,” says Mansur. “And you need to communicate to employees what to expect.”
Norgay Partners was launched in 2015 as an executive search firm helping private equity firms and portfolio companies with executive searches. In the coronavirus era, the company’s business model hasn’t changed, but its methods of conducting searches and helping its clients has.
“We are partners now more than ever. We want candidates to not only be hired, but to thrive and that’s more important than ever in today’s environment,” says Mary Gay Townsend, a managing partner of New York-based Norgay Partners. “Now that traditional recruiting methods of meeting candidates in person aren’t available, we have to do even more and even better and solve for our clients today.”
Even though hiring isn’t necessarily a top priority for most private equity firms right now, Norgay is actively conducting searches and helping private equity firms with staffing. Key roles such as CFOs, controllers and other finance positions, along with reporting roles, need to be filled at PE firms regardless of the coronavirus crisis. And, “you need them especially during Covid when firms need to understand more than ever the challenges that they and their portfolio companies face,” says Townsend.
Norgay is also helping clients with new hires who start in their positions before ever meeting someone at the company. “We are helping with those transitions to make onboarding as smooth as possible,” she says.
Townsend says the changes caused by the coronavirus may be here to stay. “We are very fortunate that we can use technology to work. Everyone is learning how productive they can be using technology. People are working harder than ever,” she says.
Norgay is completing assessments of candidates virtually and now uses skill assessment tests and personality assessments to make decisions on candidates. “Without in-person face-to-face time, assessments will be vital,” Townsend says. “We are doing a lot of virtual meetings before we even bring that candidate to the client.”
Townsend also says it’s critical to get as much information as possible prior to the final meeting between candidate and client so that terms of employment like garden leave and start dates are already settled.
In addition to regular hires, private equity firms are also struggling with summer internship and associate programs. “Every firm is unique. Some are allowing the interns to be virtual. Firms are training them virtually and allowing them to work. Others are pushing off start dates by months or even a year. Others are telling their MBA hires they are guaranteed a job when this is over, but they do not need to work this summer. It’s really been all over the map,” says Townsend.
How healthy are your portfolio companies?
Cepres is a digital platform for investment analytics and data solutions for private equity firms and limited partners. Users can view and analyze their own investment data and gain insights into their portfolio in confidential settings. The company has offices all over the world, and more than 1,000 limited partners digitally connected to more than 8,000 private equity managers globally.
“LPs can see where GPs are investing,” says Daniel Schmidt, CEO of Cepres. “This can give them investment due diligence, allow them to understand underlying portfolio company’s revenue, Ebitda and help them make overall smarter investment decisions when committing capital. If they are already investing, they can use it as a monitoring tool to have a constant overview of how companies are doing and what the GPs are investing in.”
It works similarly with PE firms, he says. “They are able to review their investments, see how their portfolio companies are doing and look at how they can achieve returns. We give them this data in an easy-to-digest way.”
In light of Covid-19, the company has begun to offer free portfolio health checks to private equity firms and limited partners so they can see where their portfolios might be vulnerable. All portfolio companies will be affected differently, and Cepres allows users to see that differentiation.
“Investors can see things like their margins and how Covid will impact their returns. It’s good to understand where the returns will come from. Some industries will suffer a lot, other industries like digital industries will do well. We can easily assess where your portfolio has risk,” says Schmidt.
In addition to stress testing portfolios and monitoring liquidity, the technology tracks where revenue is coming from and has a rating system so investors can see where they may need to support a company and prepare for the future. Another benefit the portfolio check is that is allows investors to see if there are any federal or state programs that support the industries they are invested in. There are different financial programs in different states and industries, Schmidt says.
While Cepres’ offering may be particularly important during the coronavirus crisis, Schmidt says there has been a growing macro trend toward relying on predictive analytics in private equity for quite some time. “More firms want to make decisions based on data today. Covid has made the need explode, but it is becoming the new normal for the future. It’s an objective way to view how a portfolio will perform over time and it will help investors optimize their portfolio strategy,” he says. “It’s more important than ever to understand your portfolio in detail and to be able to manage data and make the right predictive assumptions.”
How much are they worth?
Valuation Research Corp., known as VRC, describes itself as one of the largest valuation and advisory firms in the U.S. Its services are always needed, but they have become increasingly important for valuing companies or securities--especially those that are illiquid—in uncertain times.
VRC has private equity clients, as well as publicly traded business development companies, private credit funds and hedge funds. The coronavirus has certainly impacted first-quarter marks for these clients, and Jeff Miller, a managing director with VRC, expects to see changes going into the second quarter.
As the end of the first quarter approached, equity values showed tremendous downside volatility as investors started to understand the implications of the coronavirus pandemic on the overall economy and specific companies and industries.
“As we emerged from Q1, there were many uncertainties facing portfolio companies that led management and sponsors scrambling for any data they could acquire to give them a clearer picture as to what they could expect in the immediate term, and over the longer term,” Miller says. “As we head into Q2, there are many things we will need to understand in order to assist our clients with their quarter-end fair value exercises.”
Two items that will require significant consideration are industry impact and metric adjustments, says Miller. “Some industries saw significant declines while others were less impacted. We need to monitor how expectations are changing and how equity markets are adjusting to the latest environment. Also, we anticipate that there will be a significant amount of add-backs to Ebitda related to Covid-19, which we will need to understand via conversations with our clients as to their legitimacy and long-term achievement.”
One thing is certain: Clients need guidance. VRC has seen a big uptick in portfolio valuation work. “PE fund managers are relying more heavily on a third-party valuation firm for the purpose of managing investor reporting requirements that must be completed on a periodic basis,” he says. “Investors expect transparency into valuation estimates including info on methodologies, key market inputs, valuation models and accurate markets for performance measurements.”
In addition to portfolio valuation help, private equity firms are reaching out to VRC for help with equity compensation calculations as well as goodwill impairment testing for their portfolio companies.
Section 409A equity compensation valuations play a sizeable role in the world of private equity, Miller says, and coronavirus-related market changes may be considered material events that warrant changes to a company’s 409A valuation. VRC’s valuation professionals work closely with firms and their board members and attorneys to help determine if companies need updated 409A valuations.
The company recommends that firms proactively model the financial reporting implications as a defensive measure to avoid forcing compensation committees, CEOs or chief financial officers to make sudden and potentially drastic decisions.
Buying and selling from a safe distance
While Axial has historically taken a hybrid online/offline approach by offering online deal sourcing along with offline elements like events, its online business is now more important than ever. The company’s online deal platform allows buyers and investors to source deals within specific criteria across financials, geography, keywords and more than 20,000 verticals and sub-sectors.
“Members are actively originating opportunities and submitting and signing letters of intents despite Covid,” says Peter Lehrman, founder and CEO of the New York-based company. “Historically, the top of the funnel of the deal process consisted of in-person networking, in-person events, phone calls, emails and meetings. So many of those activities and dealmaking channels are on pause. Our platform allows sellers and buyers to engage confidentially in a lot of the top-of-the-funnel activities that they are missing today.”
Axial is exclusively focused on lower middle market, change of control, debt, minority equity and co-investment transactions involving companies with $5 million to $250 million in total enterprise value. The company specializes in healthcare, industrial manufacturing, software/IT services, healthcare and consumer sectors. Axial now has more than 3,400 investment bankers and advisory firms in the fold.
And despite the turmoil that caused by Covid-19, Axial’s website is still seeing decent activity. The New York-based company started keeping a record of activity on March 13th, when President Trump declared a National Emergency. Since then, 707 new deals have been brought to market on the platform and more than 4,500 non-disclosure agreements have been signed. There are more than 5,000 deals currently in market on the platform.
“Even in April when there was maximum uncertainty, a handful of buyside members were still comfortable signing letters of intent,” Lehrman says. “I think it shows the market is proceeding with cautious optimism at the top of the funnel. It’s the bottom of the funnel that is on hold, with in-person diligence all but impossible for both the lenders and the equity. Lots of deals that are supposed to close are in a holding pattern. There is a building backlog accumulating and a greater than normal number of letters of intent will break.”
Axial is adapting its tools to make it easier to do more digitally. The company just unveiled a digitally signable non-disclosure agreement that can be customized and then signed without a scanner or printer. “It takes some friction out of the equation and makes the process quicker,” Lehrman says. Overall, the market is becoming more capable of using digital tools, with more video chats and electronic data sharing.
“When a dealmaker does hail an Uber or get on a plane to meet in person, it will mean they are that much more serious about the deal,” he says. “Dealmakers will have done more of the work virtually and once they hit the road the deal will be more deeply developed. In-person meetings are and always will be the gold standard and vital to dealmaking, but they will continue to trend toward the bottom half of the deal funnel with the arrival of more digital transaction tools and video communications.”