The new norm for PE transactions

Covid-19 and the global lockdown has left deals to be delayed and the PE market on hold. Ongoing uncertainty is reframing investment priorities.

The global lockdown, work from home protocols and restrictions on travel have put on hold and even cancelled PE transactions across most industries. Many PE stakeholders have had to throw pre-Covid-19 valuations out the window, as the unprecedented crisis and lack of visibility beyond it makes determining earnings forecasts difficult and new valuations even harder to price, however they have continued with the deals they had previously lined up.

New normal

To ensure that they’re on solid ground, many firms are reassessing the traditional ways they thought about the valuation metrics used to assess assets and companies. Pre-crisis valuations largely focused on Ebitda multiples, growth of revenue and business expansion. Firms are becoming much more focused on bottom up analysis, with greater emphasis on companies’ liquidity needs and cash reserves.

Bright spots

While bigger deals are still murky and facing delay, many firms with capital to deploy are seeking bolt-ons and growth transactions. Compared to full scale takeovers, smaller minority investments are an easy, and lower risk way to add value to a portfolio, especially at a time when the European leveraged finance markets are out of play.

In the wake of public market dislocation, many of the deals that firms take forward will be in the form of carve outs and take-privates, as opposed to the typical auction process. Deals will be more partnership based, with both investor and vendor looking to accommodate each other’s needs and objectives in a solution-focused pro

Many sectors could see valuation write downs of between 20-50%, however a lot of companies critical to the crisis and or with services and goods heavily in demand, will be seeing significant bumps in valuation multiples, however, while as many as 10% of businesses could be benefiting from the current environment, even those deals may be hampered, as the lockdown complicates on site due diligence, assessment of leadership teams and the meeting of firms and management teams. There are some really good transactions around at the moment, some of which will complete in the next quarter, but for many the time is just not right and the process will probably be paused.

Life after lockdown

Once the market returns, demand for companies that have been able to come through the crisis will be amplified, especially as many other target companies and potential deals fall out of the market. Now is a brilliant opportunity for businesses to prove how resilient they are and how sticky their customers are without having new business or having to rely on traditional things like networking. Such companies will have to carefully and clearly articulate both their ability to respond to short term shocks and a strategy to future proof their business model.

A significant volume of transaction activity is expected to be halted in 2020, But some of the most favourable buying opportunities and best performing vintages were raised during years of economic crisis. Sponsors that are game enough to invest earlier in the downturn recovery phase are likely to see far greater returns, associated with less competition, lower valuation multiples and a maximum uplift from macroeconomic tailwinds.

Whatever happens we are here should you need c-suite experts to explore, prepare or run deals!

Richard Baker
Head of CFO Practice
Carter Schwartz