Introduction

It is said that even though some parts of the private equity industry are in need of triage, it can survive the implications of COVID-19 because it has sufficient capital already raised but not deployed – its 'dry powder'.

As is always the case, dry powder is not just for high-profile acquisitions – it can also transform a target's potential into realisation. Funds' ongoing investment in their portfolio companies is what generates long-term returns on exit. However, that use of dry powder is not always about the growth of a company – sometimes it is about keeping the company going during tough times.

For private equity firms which have invested in sectors that are particularly suffering (eg, hospitality, travel and retail), decisions must be made as to whether suitable triage can be administered (for companies where there are good long-term prospects) or whether the patient is beyond help and it would be a case of throwing good money after bad.

Investors will be analysing their portfolio with a fine-tooth comb to determine which approach to take. Effectively using dry powder now on a company that is in difficulty but has strong fundamentals will ensure that such dry powder is well spent.

Are the COVID-19 pandemic and the 2008 crash similar in impact?

The financial fallout from the COVID-19 pandemic is different to the 2008 financial crisis. The latter was primarily caused by the financial system itself, whereas the former is an external crisis that has prevented the financial system from operating normally.

Private equity firms are well placed to take advantage of targets at deeply discounted prices at the right time. Dry powder has, in many cases, already been raised for these acquisitions and the lack of credit seen during the 2008 crash will not be a factor this time. Instead, deals are ready to be done when the time is right.

The other big difference compared with 2008 will be timing. In 2008 private equity firms waited too long to act and missed some of the double-digit returns that fast movers could have enjoyed. Those lessons have been learnt and the best-placed firms will not repeat those mistakes.

What kinds of distressed deal are expected?

Investors may be re-examining deals that they considered too expensive just months ago. However, there is no use pursuing a deal for a target simply because it is now within the investor's price range. Careful analysis will need to be undertaken to ensure that any acquisitions can still be considered viable in a post-COVID-19 world. It may well be a case of quality over quantity.

Are there any other examples of private equity working or not working during this period?

Some portfolio companies have hugely benefited from private equity backing during this time due to their ability to scale up quickly through investment and take advantage of the large surge in demand due to the lockdown. Private equity-backed companies with a focus on activities that have received renewed interest during this period of enforced confinement (eg, home crafts, food delivery and home exercise) and tech-focused companies which have taken advantage of the move to living, working and socialising through screens are no doubt thankful for the investment in them to date and the swift deployment of dry powder in recent months, as this has enabled them to avoid missing any opportunity to profit from the sharp spike in demand for their services.

An earlier version of this article was first published in Citywealth.