PE firms have taken several leaps since the Great Recession more than 10 years ago to prepare for the next downturn. Now that the downturn is here, there are some key strategic differences in the actions that PE professionals are taking with respect to their reactions to the pandemic based on whether they’re focused more on the fund or the portfolio.
At the fund level
In our research, respondents who tend to focus on fund-level issues represent 42% of those surveyed. Among their key concerns is a lack of fund diversification. In response, they’re working to diversify revenue streams and proactively communicating with limited partners (LPs) about the extent of disruption in the portfolio. They’re having conversations about new opportunities and any flexibility required in limited partnership agreements (LPAs). They may need to execute on those ambitions, including extensions or additional flex in investment mandates.
At the portfolio level
Respondents whose concerns weight more heavily on the portfolio, who represent 58% of those surveyed, see margin pressure, high levels of leverage and exposure to cyclical industries as primary areas of concern. To manage these risks, respondents say they are stress-testing their portfolios and working to make sure that companies have sufficient liquidity and working capital under a range of different pandemic scenarios. For some companies, corrective actions will be available, while others may require additional equity from the sponsor. Overall, 72% of respondents indicate that they were preparing for fresh capital injections. Fund-focused professionals are anticipating the need to renegotiate credit lines (60% versus 45% of portfolio managers); whereas portfolio managers are focused on reducing overall leverage (63% versus 44% of fund managers).