The last year has been a tumultuous one for the business and finance communities. Economic instability, the ongoing COVID-19 pandemic, and social unrest have all combined to create an environment filled with uncertainty. Concerns about the pandemic and local “safer-at-home” mandates have forced businesses to shutter their stores, restaurants, and offices, driven up unemployment, and negatively impacted the economy.
But, despite the pandemic and the associated economic downturn, some private equity companies – depending largely on the markets in which they specialize – saw their portfolio companies keep their value, or even increase in value.
In the latest episode of BDO’s Private Equity PErspectives podcast, entitled, “Portfolio Re-strategizing and Restructuring,” host, Todd Kinney, was joined by Daniel Schwartz, principal at CIP Capital, and Adam Gross, managing director at JEGI, to discuss the state of private equity and the impact that economic trends and conditions were having on deal flow and portfolio value.
While many listeners may anticipate that private equity firms were struggling in this economy, it turns out that many had invested in companies with products and solutions in high demand during the pandemic.
“…a lot of the business models we focus on have held up quite well,” Schwartz explained. “When you think about recurring software companies that provide mission-critical functions, those have held up well. They’ve kind of proven their worth in this COVID environment, if you will, and why they trade at premium EBITDA and even revenue multiples, in many cases.”
Other portfolio companies that may have been expected to struggle were able to pivot their business models and offerings to also weather the economic downturn.
“For media companies that have live events, I think it’s been a very interesting time for those companies because what they’ve done is successfully transitioned from live events to digital events, webinars, and podcasts,” Gross said. “Unfortunately, they won’t get the same revenue dollars that they will in a live event, but they will get stronger margins. You can hold up on the margin side of the equation but lose some on the revenue side of the equation.”
According to Schwartz and Gross, the unique economic environment created by the pandemic in 2020 impacted more than just the revenues of portfolio companies and value – it also had a direct influence on deal flow and M&A activity. Early in the year, as the pandemic started to spread across the U.S., deal flow virtually stopped. However, that proved to be temporary.
“If I think back, what we saw at the beginning of the pandemic was that the deal market stopped. If you had a company that was in-market, it was most likely pulled, the debt market shut down, and rightfully so, everybody tried to focus on their portfolio, and, honestly, their families and their personal situations,” Schwartz said. “When we got to…the beginning of the summer, we started to see it loosen up. The debt market started to open back up and if you had a company that thrived during the pandemic, or even just fared okay, then it was potentially in-play, and it became more socially acceptable to start engaging in transactions.”
During the remainder of their discussion, Kinney, Schwartz and Gross gave their predictions for private equity firms in 2021, and also explained how recent election results could impact the business community in the coming year. To listen to the episode in its entirety, click HERE. To subscribe to the BDO Private Equity Perspectives Podcast, click HERE.