Coronavirus crisis is changing everything, including private equity and M&A

The coronavirus pandemic will change the world and how we live in it profoundly, with dramatic shifts in how we gather and meet, work and learn, make products and distribute them. But exactly how the transformations will play out in the middle market is difficult to discern. Several recent reports and surveys aim to provide a sense of direction.

Preparing for a lengthy downturn, dealmakers expect their organizations to change their business strategy, including cost reductions in the near term and possible layoffs in the next 12 months, according to a poll of 100 global M&A professionals conducted by Datasite from March 26 to April 6. On average, dealmakers rated the intensity of the economic downturn as an eight on a scale from one to 10 with 10 being the worst. Fifty-nine percent said they expect the drop to last longer than seven months. Eighty percent said that the global economic decline is already causing, or likely to cause, significant adjustments to their company’s strategy in the near future, with more than 55 percent expecting to switch from a strategy of growth to a strategy of maintenance or restructuring.

In private equity, general partners are expected to issue smaller and fewer capital calls, finds a recent PitchBook report. “We believe this pandemic-related crisis will differ from past crises in the shorter term,” says the report. “GPs are already issuing capital calls to inject equity and rescue some portfolio companies. Furthermore, many GPs have been or will be issuing capital calls to repay their exiting capital call subscription loans.”

“Buyout fund valuations are expected to fall just as public equity indices have in recent weeks, though to a lesser extent,” says the PitchBook report. Limited partners “must be aware that they are likely to face the denominator effect in their portfolios, which may prevent them from upping their allocations. However, times of crisis tend to be the best times to invest in private (or public) equities and LPs should take advantage of this pricing environment if possible.”

Technology investors and executives also expect the Covid-19 crisis to have a lengthy impact on business operations, leading to a “U-shaped economic recession,” finds a survey of nearly 300 tech executives, entrepreneurs, and private equity and venture capital investors polled by Stifel Financial Corp. (NYSE: SF) April 6 - 12. Says the report: “While a natural slowdown in activity is expected during this period of virus mitigation, we believe that technology will be the key driver of a global economic recovery, and the sector will continue to grow strongly post-pandemic.”