• 28 Apr 2020
  • Reading time
    7 minutes

The black swan - how PEs can survive unexpected events and thrive beyond them


Like every business, the Private Equity sector has been buffeted by the COVID-19 crisis.

It is worth reiterating why:

  1. Families must come first: as a global health emergency, COVID-19 is disrupting business in the same way as the largest geopolitical upheavals; because consumers, businesspeople and PE professionals will rightly prioritise their families and communities over their business activities.
  2. Reconfiguration of sectors: COVID-19 represents a long term restructuring of corporate value. A March 20 survey of DACH-region PE professionals put heavy plant and the transport, logistics and tourism  sectors at greatest risk of permanent negative impact (retail was, surprisingly, far behind on this list). JPMorgan, meanwhile is unsurprisingly betting big on an e-commerce boom proving sustainable long after the crisis ends. Either way, the effects will be permanent: Alan Jope, CEO of leading FMCG firm, Unilever, said on April 22nd, "We are preparing for lasting changes in consumer behaviour, in each country, as we move out of the crisis and into recovery.”
  3. Reconfiguration of businesses: Businesses, whether PE funds themselves or their portfolio, have been forced to make dramatic adjustments to their operating models overnight. For some, this just means remote working; for others a pivot, and for others still a shutdown and everything in between. For all, it means operational disruption and a challenging loss of financial visibility.
  4. No clear timeline to resolution: The set of unknowns which must be resolved in order to lead businesses to firmer foundations is not limited to the possible invention of a COVID-19 vaccine. Further complexities include:
    1. supply chain disruptions
    2. complex intergovernmental interventions
    3. uncertain consumer sentiment and economic outlook

All of these promise unpredictability which affects the immediate operations of portfolio businesses and ongoing liquidity and cash. It’s no surprise that in PwC’s inaugural COVID-19 CFO Pulse Survey, CFOs rated the “Financial impact including effects on results of operations, future periods, and liquidity and capital resources” (75%) as more worrying even than a “Potential global recession” (70%).


However, only the last of these issues represents long-term uncertainty. The industry has spent April 2020 triaging the crisis, shoring up operational and financial concerns. McKinsey presents a five-step triage plan: “Many portfolio companies are engaging in some or all of five priorities: (1) workforce protection and productivity, (2) managing financial and liquidity risk, (3) stabilizing operations, (4) engaging with customers, and (5) preparing for recovery and growth.” Again, this advice is as applicable to PE itself as to its portfolio.

Most PE and VC firms today find themselves at step 3 and 4 of McKinsey’s plan. We are more or less comfortable working from home. We have made decisions about the survival and likely ongoing shape of portfolio businesses. Management teams understand the shape (if not the overall delivery or future) of government support and furlough schemes, and perhaps most importantly as regards point 4 above, the likely timeline of COVID-19 is becoming a little clearer:

  • Hard Lockdown – 10 weeks
  • Soft lockdown – 4 months
  • Social distancing norm – 12 months
  • Some form of normality – 18 months

That timeline alone gives GPs a degree of predictability to apply to their portfolios and future investments. And with various degrees of lockdown in force across the world, we now have the breathing space to take McKinsey’s fifth step: looking to the horizon rather than the day-to-day. 

Positioning for growth

That future is not without opportunity, although opinions differ. A March 25-27 survey of PE professionals by PEI found that “83% expect to be more active to take advantage of low asset valuations”.

Pitchbook’s European PE breakdown is less optimistic, reporting that “European PE fundraising fell substantially in Q1, and 2020 could be on track for historically poor fundraising totals”, and “Add-on, take-private and PIPE deals may all become more frequent” (i.e. the PE  asset class is seeking safe harbour in breadth).

The truth is, we should be wary of the validity of statistics at the moment, as sentiment from consumers and businesses alike in the coming months will be measurable in days and weeks, not years. 

But if sentiment is unpredictable, the strategy is clear. McKinsey says, “After taking initial actions to recover and stabilize, portfolio companies can prepare for growth. In the last downturn, many portfolio companies had success by investing at greater rates than their competitors.” Their analysts also point out that we can expect a glut of M&A opportunities. Calling the most effective performers in the last recession “Resilients”, McKinsey wrote in a 2019 note:

 “Resilients created flexibility—a safety buffer. They did this by cleaning up their balance sheets before the trough, which helped them be more acquisitive afterward… At the first sign of economic recovery, the resilients shifted to M&A, using their superior cash levels to acquire assets that their peers were dumping in order to survive. Overall, the resilients were about 10 percent more acquisitive early in the recovery. They accelerated when the economy was stuck in low gear.

Resilients cut costs ahead of the curve. There is little evidence to suggest that the resilients were better at timing the market. However, it is quite clear that they prepared earlier, moved faster, and cut deeper when recessionary signs were emerging.” To echo the words of New Zealand PM Jacinda Ardern’s successful approach to COVID-19, “Go hard and go early”.

Those strategies will also benefit from once-in-a-lifetime structural changes to the ways in which we work, and therefore in which businesses operate. Buried in Mary Meeker’s Bond  Capital Coronavirus Trends Report are hints like this: “We are experiencing a rapid short-term reallocation of labor not experienced since WWII… on-demand work/jobs will evolve and become a bigger part of our economy… on-demand work can allow displaced workers to schedule hours around life commitments such as childcare and/or education.” A by-product of COVID-19 will be an acceleration of new labour and technology trends which many businesses, once they have pushed the appropriate reset button (restructure, divest, Chapter 11) will be able to deploy for future success.

A playbook from surviving to thriving

Whilst we live in unpredictable times, there are some things that PE houses can rely on. The same skills and methodologies apply in the emerging world as they did in the old world. They must, however, be applied differently:

  • Move from a war footing to optimisation. As businesses have successfully reformulated their financial and delivery models in a matter of 2-4 weeks, so now is the time to optimise those models: 
    • Putting the right people in the right roles. 
    • Cutting overheads and optimising delivery.
    • Managing supply chains (including adding capacity if necessary): As the FT reports, “Businesses will be forced to rethink their global value chains. These chains were shaped to maximise efficiency and profits. And...the disadvantages of a system that requires all of its elements to work like clockwork have now been exposed”. 
    • Deploying technology. 
    • And normalising communications both between employees and customers.
  • Throw away long-term strategies. Consumers are at the mercy of their governments and new legislation to control the pandemic; which will influence both sentiment and the products and services they are allowed to use. Businesses must follow those trends and prioritise agility. All business functions from finance to marketing must operate on timelines marked out in weeks, not quarters.
  • Use every piece of data. To support that agility, extract data from across the business and deploy it to cut costs and inform strategies. Nicholas d’Adhemar, Apperio CEO, says

“In the space of a month, we have returned to business fundamentals: extend the cash runway by reducing overheads. But this must happen without holding back the business. In the context of PE, for example, Apperio provides a current state analysis of legal spend and therefore the opportunity to reduce it; that is very different to throttling back on legal resources arbitrarily and risking the capacity to execute on M&A overall.”

  • Embrace new ways of working. Remote working is already non-negotiable. We can expect senior-level change, too. Bill George, Senior fellow at Harvard Business School wrote in Fortune on April 10th, “Companies will need far fewer middle managers, project managers, and executive assistants. Managers’ jobs should be changed into team leadership roles where the managers produce and coach... Instead of consultants that do management’s work, companies should give the challenges to their own employees who know the business far better than any consultant.”
  • Keep learning. Even on a macro level. KKR, for example, have hired an infectious diseases expert to bolster its understanding of COVID-19.

In the space of a month, resilience has become the byword of good management: resilience of people, finances and processes. As we emerge from the firefighting aspect of portfolio management under COVID-19, opportunities are becoming apparent to apply the same degree of discipline to future business propositions in order to thrive in what will remain an unpredictable commercial world.


Nicholas d'Adhemar

Nicholas d'Adhemar


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