Private Equity Beyond COVID-19: Disruption, Innovation, and Cultivating Evolution

EisnerAmper’s 5th Annual Alternative Investment Summit

EisnerAmper’s 5th Annual Alternative Investment Summit 2020: A Year of Change included a number of sessions about where the industry is headed and featured prominent thought leaders.  At one session, “Private Equity Beyond COVID-19: Disruption, Innovation and Cultivating Evolution,” panelists discussed how private equity firms were impacted by the COVID-19 pandemic and the outlook for the future. Some of the topics discussed included fundraising, portfolio company operations, limited partner (LP) relations, and the role of technology. The panelists included:

• Paul Gulburg, Senior Equity Analyst-Financials, Bloomberg Finance, Moderator
• Susan Cates, Partner, Leeds Equity Partners
• John Frankel, Partner, ff Venture Capital
• Arthur Peponis, Head of Private Equity, Angelo Gordon.

Fundraising

Panelists concurred that, during the pandemic, the private equity firms most effective in raising capital for new deals were those fully immersed in their respective sectors and with the strongest relationships.

Despite the pandemic, the panelists said that their due diligence and fundraising programs remained consistent, but functioned in a virtual environment utilizing web conferencing rather than in-person meetings.

“Private equity firms raised capital at average levels, but will focus on the deployment of capital based on the changed environment and change in consumer preferences,” Frankel said.

Portfolio Company Operations

Panelists also discussed the need for private equity portfolio companies to respond to the changing environment. The panelists indicated that technology-focused portfolio companies accelerated growth during the pandemic with an average 30% year-over-year growth in revenue primarily due to people working and accessing technology remotely. Certain examples stood out, such as in the restaurant industry, where Angelo Gordon took decisive action by closing units and adapting to pandemic preferences of take-out orders, which quadrupled from normal rates.

“Private equity firms will have to be more nimble in way of operations and increase frequency of forecasts to assess financial viability when the environment normalizes.” Mr. Peponis said. In addition, firms should also assist their portfolio companies to develop a new hybrid model, taking a portion of operations/workforce to a virtual environment as consumer preferences will transform.

With respect to investments made in portfolio companies, private equity firms may structure deals differently within sectors believed to be negatively impacted and include downside protection. Instead of the traditional equity investment, firms may offer more service-oriented value while reducing their initial capital investment.

Limited Partners

Concerns of LPs were discussed, including issues such as how they access information and understand portfolio company operations during a period of volatility. The panelists all said they have increased communication and transparency with LPs via individual discussions and reached out to understand the plan forward, including hybrid communication channels and a long-term view of portfolio company operations. The panelists displayed a positive outlook for LPs to invest over the next couple of years, particularly within early-stage technology companies, which plan to utilize drones and robotics to advance business. The panelists concurred that the state of private equity investments was functioning in a “strong economy interrupted” and not a natural recession. “Future opportunities will arise in sector-specific niches rather than a generalist approach,” Cates said. Private equity will need to utilize their deep expertise within sectors to identify areas of growth/opportunity and common pitfalls.

Technology

The panel also discussed how firms assess digitally transforming operations. Technology is now the driving force through most phases of the investment process including cultivation of deals and valuation of portfolio companies. Artificial intelligence is coming into play to identify opportunities and conduct data analytics to create an efficient work environment and operating structure. For ff Venture Capital’s 76 portfolio companies, all operations were converted to virtual, as technology played a role to create seamless, efficient work environments. Their employees’ productivity has significantly increased while saving 5-15 hours per person when not commuting to physical worksites.

In conclusion, the conventional ways of the past will have to be re-engineered with transformative action.  Private equity firms will lead the conversation with portfolio companies and LPs to navigate the change to enhance strategy. Those who recognize the opportunities that arise within their sectors will innovate and cultivate evolution into the future.

You can view the panel here.