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Coronavirus - Private equity and the pandemic: Introduction to a bitesize series – Global

  • Global
  • Coronavirus
  • Corporate

23-06-2020

We are now 14 weeks into lockdown and the world as we know it has changed forever. As the initial phase of adjustment to the new normal comes to an end and the green shoots of restrictions being eased start to appear, this feels like the appropriate time to reflect on what we have just experienced, what our clients are currently dealing with and what the near future holds.

In this series of weekly “bitesize” articles, we will focus on current issues relevant to private equity houses and their portfolio companies and look forward to the issues which are likely to be relevant to them over the coming months. Please click here for details of the weekly programme and the topics we will write about.

Before we do that, lets consider what we have just experienced. I am writing this article in my home office – my new office. With my 2 year old son having returned to nursery today (almost sprinting all the way there in a desperate search for some interaction with his peers), I am finding it to be very productive environment in which to think and to work - though I do miss the camaraderie of the office and being able to meet with clients and colleagues.

Looking back to the first few weeks of lock down, we were all forced to adapt to a new way of working and there was a short sharp period of change and adjustment. The priority for our private equity clients was to focus on their portfolio businesses, assess the impact of COVID 19 on those businesses and find new ways of continuing effective operations. Never before has management information and communication been so important. Having worked with many of you over the years, there is no better industry than ours to be flexible, to adapt and to drive positive change. It has been particularly encouraging to hear from a number of investors that their portfolio companies are now stable and well prepared for the gradual opening up of the economy across the remainder of this year.

Of course certain sectors have been more greatly impacted than others. There have been some winners and losers as there always are. The travel, entertainment and hospitality sectors have been particularly impacted. Healthcare and technology businesses have grown. Rather unsurprisingly multiples for tech enabled healthcare businesses have increased. On the other hand, unfortunately, the challenges created by the pandemic have caused some businesses to fail.

Underpinning and a key feature of this initial period has been the government led funding support, which has included:

1.

the introduction of a new Covid Corporate Financing Facility designed to provide a quick and cost effective way to raise working capital for larger firms who are facing cashflow and working capital issues due to the COVID-19 outbreak;

2.

the Coronavirus Business Interruption Loan Scheme (CBILS) to provide loans of up to £5,000,000 to small and medium sized businesses;

3.

a business rates holiday for nurseries and all businesses in the retail, hospitality and leisure sectors, so that no business rates will be payable for the 2020/2021 tax year;

4.

provision of grants of £10,000 to businesses eligible for small business rate relief or rural rate relief;

5.

businesses with a rateable value of between £15,000 and £51,000 will get a cash grant of £25,000;

6.

businesses and employers with fewer than 250 employees as of 28 February 2020 will be able to claim a refund of up to 14 days statutory sick pay and expenditure, for any eligible employee off work due to COVID-19;

7.

a deferral of all VAT payments for the period between 20 March 2020 and 30 June 2020 until January 2021;

8.

the furlough scheme pursuant to which HM Treasury will pay 80% of salaries up to £2,500 of persons who were employed and cannot work due to the COVID-19 outbreak (backdated to 1 March 2020). As announced at the end of May, the furlough scheme will close for new entrants from 30th June and the amount of funding provided will with effect from 1 August start to decrease on a monthly basis until closure of the scheme on 31st October 2020;

9.

eligibility for businesses and self-employed people in financial distress, and with outstanding tax liabilities, to receive support with their tax affairs though HMRC’s Time to Pay service; and

10. a new “future fund” aimed at high growth innovative companies facing financial difficulties who are finding it difficult to access other forms of government backing. In particular, the fund is aimed at early stage tech/life sciences business that are pre-profit and who would typically rely on venture capital/seed funding to take the business to its next stage. The fund has £250 million to invest, each investment will typically be between £125,000 and £5 million and will be provided on a matched funding basis by way of a three year convertible loan instrument with the expectation that funding can be provided within 21 days of application.

Whilst the furlough scheme and VAT deferral in particular have certainly helped portfolio companies manage their cashflow during this initial phase, very few of those companies have successfully applied for government loans. Difficulties appear to be arising in relation to lender’s internal policies and the “Undertakings in Difficulty” rules. These are EU state aid rules which look at the future viability of an entity and provide that funds cannot be lent to a company which is an “undertaking in difficulty”. The banks are responsible for assessing whether a company is in breach of this definition, but one limb of the test is that accumulated losses cannot be greater than 50% of the subscribed share capital. Clearly this is restrictive when applied to high growth businesses or businesses which are highly leveraged. That said, whilst there have been challenges, we are pleased to have advised a number of portfolio companies on successful CBILS applications. 

As this funding and support starts to fall away over the course of the year and, as a result, working capital decreases and creditor pressure mounts, we do expect to see an increase in accelerated M&A processes in respect of good businesses which would have continued to perform strongly had it not been for the impact of COVID. We expect this to present opportunities for strategic bolt-ons for portfolio businesses and new platform deals for investors, something we will comment on later in the series.

As I mentioned above, over the next few weeks, we will write about current issues relevant to private equity houses and their portfolio companies and look forward to the issues which are likely to be relevant to them over the coming months.

Next week Chris Hastings, one of our leveraged finance partners, will consider some of the trends in the finance markets and how PE clients, portfolio companies, other advisers and lenders have been reacting to the challenges of the last few months.