As a result, PE exit activity unsurprisingly has seen steep declines in the first half of this year. Firms announced exits valued at US$123b, nearly 50% lower than the first half of 2019. PE-backed IPOs have remained muted on volatility in public equities – down 62% versus 1H2019, to US$7b. Similarly, exits via trade sales and secondaries saw declines of 50% versus 1H2019.
While we do not yet know when exit activity will resume in earnest, the window could reopen sooner than we think. Market sentiment post-crisis could turn positive more quickly than it did after the great financial crisis; already, there are signs that IPOs may be brought back to life within a few months. For PE firms with a pipeline of assets they were preparing to sell in the first part of this year, what should they be doing to prepare for exit in a post-COVID-19 world?
The good news is the process hasn’t changed at all; it’s the environment around it that has changed. That being said, because the environment is so different, PE firms need to re-examine the full range of assumptions around their exit-ready companies. Recent reports have emphasized how many investors were already foreseeing an economic downturn and were preparing to encounter macro headwinds while monetizing portfolios (albeit not as severe as what’s being experienced currently).
PE firms can take several steps to rethink their pipeline in the context of today’s events:
Review the portfolio and rethink your timeline
Firms need to conduct a comprehensive review of their portfolio and adjust expectations to align with the reality of today’s market. In some cases, reshuffling the pipeline and placing ahead of companies that were once further down the list may allow you to be opportunistic about companies that may have increased in value; in other cases, firms may need to postpone plans for companies that now need more time and resources to deliver full value.
To a degree, timing may in some cases be influenced by the age of the fund. There are funds in their early stage that are comfortable holding on to their investments while letting the storm pass. On the contrary, there will be funds that are nearing the end of their lifecycle and bound to either divest assets or transfer to a subsequent vehicle.
Rewrite the equity story
The market’s current uncertainties are leading to an increased dependency on data-driven decision making. Firms looking to exit assets need to rewrite their equity stories. Sellers need to conduct scenario planning to reassure buyers they’ve thought through all the potential angles, which can be summarized into a single probability-weighted forecast that provides a clear picture of what can happen with the business, and what levers buyers can pull.
To properly accomplish this, firms need to identify new informational needs, including those that are nonfinancial in nature. What informational gaps have developed as a result of COVID-19? How is management thinking about proforma results to isolate the impacts of the pandemic? Which parts of the forecast are COVID-19-related, versus those that were going to occur anyway? Sellers that can articulate a coherent narrative will give potential buyers more comfort to bid.