How private equity adapted to Covid-19

Covid-19 lockdowns have created a unique set of challenges for private equity dealmaking and fundraising in 2020.

According to consultancy Bain & Co, H1 2020 deal count in the Americas and Europe, the Middle East and Africa (EMEA) dropped by 36% and 34% respectively when compared to H1 2019 . Exit activity has been equally tepid, with private equity vendors preferring to hold assets until markets settle. According to investment bank Investec’s GP Trends Survey for 2020, which polled 400 private equity professionals globally, 83% of respondents said they did not expect to make a portfolio exit during the next 12 months .

Fundraising activity, meanwhile, has encountered similar obstacles. According to data provider Preqin, only 225 private equity and venture capital funds closed over the first half of the year, raising $116 billion between them, down 47% and 23% respectively compared to the previous year . Many managers have decided to delay fundraisings where possible, while investors have generally prioritised assessing the financial health of the funds already in their portfolios over making long-term commitments to new funds.

Private equity adjusts to Covid-19 

Yet for all the coronavirus headwinds, private equity has found a way to adapt and continue doing deals and raising capital.

“From the beginning of March to the end of April the whole market stopped investing, but since then the industry has adapted to working remotely and business has bounced back to normal. The new logistics are a given,” says Olivier Personnaz, Head of Ardian Buyout UK.

François Jerphagnon, Head of Ardian Expansion, points out that his team has made three new investments this year (Swissbit, Finaxy and Syclef) and secured the exit of Gantner Technologies. Ardian Expansion also closed its fifth fund, Ardian Expansion V, on €2Bn. This doubled the size of its predecessor vehicle, which was raised in 2016.

But how exactly have investment managers built conviction in assets when current trading and future earnings forecasts have been so volatile? What steps have vendors had to take to steer portfolio companies to exit and how have private equity managers given limited partner (LP) investors the confidence to make long-term commitments to new funds at a time of such profound disruption?

Preparation and thoughtfulness

Personnaz says the pandemic has reemphasized the importance of sound investment fundamentals. 

“We have focused on our key sectors of healthcare, food, services and technology, and stuck to the principle of identifying good companies in those industries that we can help grow,” Personnaz says. “We haven’t felt the need to fundamentally shift our investment approach as investing in companies with strong growth and committed management teams cuts across cycles.” 
   
Nevertheless, it has still been incredibly difficult to assign normative valuations to businesses through the pandemic. In order to navigate the upheaval, Personnaz says Ardian has grouped deal flow across three categories when assessing ‘investability’ through the Covid-19 dislocation period.

Ardian has filtered for how businesses performed through initial lockdowns, performance when economies re-opened and the long-term prospects for earnings in the event of further lockdowns. This has broadly split the opportunities set into businesses that struggled through the first lockdown period, those that have survived in spite of the obstacles, and companies that have traded well with good visibility on future earnings.

Every opportunity has been considered on its individual merits, naturally even the strongest businesses have been impacted by the pandemic in some way, but Ardian has pivoted towards the latter two categories as these situations provide a clearer view on downside risk, says Personnaz. This has given managers room to build an investment case even when current earnings are choppy. 

Managers that have been able to sift through deal flow with a clear set of criteria have held a deal execution advantage when assets have come to market. The challenges to dealmaking in 2020 have also rewarded managers who have invested time and resources in origination, meeting management teams and building relationships.

“Our teams will typically spend at least two years getting to know businesses and management teams before a transaction comes to market, so even at a very uncertain time we have good knowledge of an asset and senior leadership. It has allowed us to move quickly for businesses we know and like,” Jerphagnon says.

Securing value on exit 

When it comes to exiting assets, core principles have also come to the fore. This is not a time to run large, hyper-aggressive exit processes where as many buyers as possible are packed into truncated auctions.

Thoughtful sales processes and considered curation of the buyer universe has become more essential than ever, and vendors have had to recognise that sometimes buyers need more time to make judgements under the current circumstances. Vendors that have structured company exits with care, selected suitors appropriately and played straight with potential buyers have seen the rewards.

Ardian Expansion’s sale of Gantner Technologies to trade buyer Salto Systems saw these principles  at play. Gantner provides specialised access, ticketing and billing systems to fitness clubs, spas, museums and other public facilities.

Although lockdowns meant the company had faced a “complicated year”, Jerphagnon says the sale to Salto was secured as Ardian had articulated the company’s intrinsic profitability to a buyer universe comprised exclusively of trade buyers.

“When you are in a downcycle you need to demonstrate that the combination of your asset with another business will deliver higher earnings as a single entity,” Jerphagnon says. “This principle sat at the centre of the Gantner exit. We only opened the process up to trade buyers for which Gantner was a must-have.” 

Whether on the buy side or the sell side, the importance of trust in a counterparty’s behaviour, methods and deliverability has been a crucial deciding factor when investors have bought or sold assets.

“If you are buying an asset, management have to trust that you are able to deliver and that your firm will support growth with investment. Investors who opportunistically try to take advantage of the current circumstances to buy assets on the cheap with lowball offers will not get very far,” Personnaz says. “Equally, if you are bringing a company to market, buyers need to trust that you are not flying kites and trying to catch a bid. People will remember how firms have behaved through this period.

What LPs want 

Trust in asset managers has been as important when it comes to fundraising, a fact observed first-hand by Jerphagnon when Ardian Expansion V was on the road earlier this year. Formally launched at the start of 2020, Ardian Expansion V raised €2 billion in six months despite the first wave of lockdowns across the world. The six-month fundraise, however, masks months of work in the lead up to launch spent warming-up investors and understanding their requirements.  

“Existing investors represented 50% of the fund and a further 35% had invested in other Ardian funds previously. We saw allocations of close to 5% from management teams of Ardian Expansion’s portfolio companies. This speaks to the trust that has built up in our platform.” Jerphagnon says.

Ardian already had a clear map of the allocation LPs had available for 2020 before Ardian Expansion V launched, and understood how those allocations could fit into the Ardian platform. The company could then proactively build relationships with LPs interested in its offer early.

“Good relationships with current LPs and time spent identifying new ones with appetite for the product made a big difference through a period when investors were more risk-averse,” Jerphagnon says. “Investors wanted to be sure that we could continue deploying capital through the cycle, and to see how we built performance and could reproduce that going forward across the cycle.”

For all the disruption and change in financial markets in 2020, the principles of sticking to a long-term strategy and appreciating the value of relationships have proven as resolute and effective as ever.