The economic turmoil in capital markets sparked by the COVID-19 pandemic has had little effect on the capital structures of private equity funds, according to a recent survey published by Willis Towers Watson.
“Private equity-owned companies have a number of structural advantages that may have allowed them to navigate this crisis,” said Jon Pliner, Willis Towers Watson’s US head of delegated portfolio management. “In addition to the expertise provided by private equity managers, the additional access to equity and debt capital from their sponsors may also have provided some respite.”
The survey, which took place in April and covered 36 private equity funds representing 300-plus portfolio companies, was intended to find out how businesses were coping with the pandemic and to set expectations for the coming months.
The results of the survey indicate that, despite a subdued environment for exit deals during the first half of 2020, there has been little evidence of forced exits by private equity firms into a depressed market.
“Managers have been able to maintain significant flexibility over both the timing and the terms of company exits,” Pliner said. “Beyond the short-term dislocation, we also see several opportunities where we can continue to deploy capital, notably in technology, health care, and consumer staples.” He added that “with deal volumes depressed, there appears to be far less competition for opportunities and, as a result, potentially better entry pricing.”
According to the survey, 87% of respondents said their holdings were unlikely to breach covenants as a result of the pandemic, while only 13% said their holdings were either close to breaching or likely to breach covenants in the next two to three months.
However, the responses were more varied regarding customer demand for products or services, with 46% of respondents saying their holdings were experiencing a medium-to-high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy, and materials sectors. Meanwhile, sentiment among commercial services firms was strong, and 20% of consumer staples firms reported a positive impact on demand.
The impact on businesses’ supply chains and their own internal operations also remained small, with approximately 80% of respondents showing low levels of concern, indicating most private equity-held businesses effectively implemented alternative working arrangements to avoid disruptions from the COVID-19 crisis.
Private equity-owned companies “have access to high-quality expertise from managers, access to equity and debt capital from their sponsors, and active owners that are well aligned to business success,” said Willis Towers Watson in a report analyzing the survey’s findings. “Whilst the impact of the COVID-19 pandemic on global economies is still evolving, firms and companies have the right tools to tackle issues that arise.”