Coronavirus outbreak could lead to fundraising logjam, PE players warn

It could have been worse. When hundreds of international private equity players gathered in Germany for the SuperReturn conference at the end of February, the outbreak of Covid-19 (coronavirus) was still in its early stages. Industry participants noted that although a handful of LPs and GPs cancelled plans to attend, those that did make it did not seem overly concerned.

But at the time of writing, a mere two weeks after the event, the situation has noticeably escalated: the first deaths have been recorded in countries including the UK, the Netherlands, France and the US, and most businesses are now on high alert as they put in place contingency plans with regard to international travel, local meetings and remote working policies.

This does not spell good news for GPs currently in fundraising mode, according to a number of professionals Unquote spoke to in recent days. Most do not have a blanket travel ban in place, beyond scrapping trips to the worst-affected areas: "We have a policy not to travel anywhere that the UK government has issued an advisory – so we are not traveling to Milan or Asia," says one placement agent, echoing similar comments from other advisers and GPs. "Beyond that, as long as our clients are traveling, we are too."

Most players contacted are stressing that the outbreak's immediate impact on general fundraising is difficult to judge at this stage. Nevertheless, caution on the LP side is already apparent. "We do know of a number of LPs across Europe, Asia and the US who have blanket travel bans in place so it's definitely pushing out due diligence visit timetables," the same placement agent says.

Another placement agent notes that many investors are cancelling international travel and some are not taking meetings with managers coming from overseas. "Virtual conferencing is becoming a popular substitute and roadshow activity is clearly down," they add. A third placement agent concurs: "Some of our LP contacts have expressed a preference for calls instead of meetings over the next couple of weeks until the full scale of the virus is better understood."

One particular European fund-of-funds manager has told staff they are not to attend any conferences for the time being, while a pan-European GP had to turn its annual investor meeting into a webcast, Unquote has learned in recent days.

There is some anecdotal evidence that these constraints are directly affecting investment decisions, with Unquote sister publication Debtwire reporting on a direct lender missing out on a potential LP commitment after a cancelled trip.

Top of the pile
But the potential for disruption down the line is also giving investor relations professionals and their advisers cause for concern, raising the bar higher when it comes to where LPs focus their time and exacerbating bifurcation in a crowded market. "There will likely be a back-log of investor due diligence activity when the coronavirus fear abates," says the first placement agent. "In all likelihood, there are some GPs who are going to get dropped from the pipeline because the LPs are human-capital-constrained and will focus on their top relationships for due diligence."

A partner at a mid-market GP, which is currently on the fundraising trail, confirms that the outbreak is already having an impact on roadshows, and expects the situation to get worse: "The further afield the LP/GP is, the bigger the issue." But they also strike a note of optimism for European players: "We're also seeing international institutions back away completely from Asia – and so focusing more locally."

Nevertheless, European PE managers will no doubt worry that the ongoing situation could derail the momentum regained last year after a slight cooldown for fundraising in 2018. More than €124bn was collected in final closes by European managers across all strategies (excluding infrastructure) in 2019, according to Unquote Data, up from €102bn in 2018 and just shy of the record €127bn raised in 2017. With 32 funds closed so far in Q1 2020, activity was hitherto tracking to be on par with that recorded in Q4 last year (35 final closes), which showed an uptick after a dip in Q3.

According to Unquote Data, more than 230 European vehicles are currently in fundraising mode, with an aggregate target in excess of €128bn. While funds nearing their final-close targets should be relatively shielded from the impact of LPs limiting travel and/or being more selective with due diligence, this could be more problematic for those that have just hit the trail. Unquote has recorded 35 European funds launching in the past three months, with a collective target of slightly more than €30bn. In addition, a further 92 funds are currently known to be coming to market in the near future.

Deal-doing headaches
The growing travel restrictions are also not making life easy for investors and advisers working on getting deals over the line – with meetings either being done virtually, or being postponed altogether. "Normally you run a deal on a consistent tight timeline, but under coronavirus some logistics are hampered, so you need to take that into account," says one corporate finance adviser. "If you have any transactions with China, people are working, but from home and they have difficulty coordinating investment committee meetings on the phone, if at all." Says another adviser: "On the institutional investor side, meetings are getting cancelled, so roadshows are difficult."

The aforementioned mid-market GP adds that it is currently working on an Italian acquisition, but that getting into and around Italy is proving impossible, therefore affecting due diligence and timing for that transaction.

The due diligence aspect in particular is proving to be a significant hurdle, especially in sectors likely to be hit hardest by the outbreak. "We have seen a couple of deals pulled, notably in the travel and education sectors," says a bank lender. "For the education deals, that was when the businesses in question are heavily reliant on overseas students – potential PE purchasers are thinking it is tricky to forecast what is going to happen in the coming months."

In the travel sector, one high-profile casualty has been Titan Travel, with Saga putting the sale of the escorted leisure trips business on hold in early March, as first reported by Sky News. Several PE houses were understood to be readying bids for the asset before the coronavirus crisis intensified.

Mirroring market sentiment around fundraising, it is still too early to start quantifying how much of a material effect the situation will have on activity levels. "I think volume is likely to be down in the UK in the coming weeks, which is a shame as we were starting to see a good bump following the December election," the lender says. On the other hand, a partner at a German law firm expects a few deals to close in March when they would have been anticipated in April or May: "People really want to get deals done more quickly due to the uncertainty. The downside is that people are talking about different conditions such as earn-outs – buyers would not normally expect this. So this could either be a minor blip, or a huge blip."

Portfolio risk
However, beyond prospective investments or exits, these due diligence headaches are also reflecting the potential risk at portfolio level for PE players. The mid-market GP notes that lending banks in particular are stepping up their scrutiny: "It is as if they are more concerned about the virus and the knock on effects (the supply chain and liquidity implications) than they are about the actual business. And I think they are right – supply chain issues are going to be the major concern over the next couple of months.  If you can't sell or deliver, you can't invoice – which means no cash flow. In an LBO, that results in liquidity problems extremely rapidly."

Says another corporate finance adviser: "We do see a strong impact on companies that are starting to raise their eyebrows with regard to their supply chain, not just cruise ships, but also in manufacturing – where the sources they need to get things from are in China, they are fearing that the supply will stop for a couple of weeks."

PE giant Blackstone went as far as cautioning investors that "coronavirus presents material uncertainty and risk with respect to our and our funds' performance and financial results" in a recent report filed with the SEC, highlighting "disruption in global supply chains" and adverse effects in a number of industries including transportation, hospitality and entertainment. "The outbreak could have a continued adverse impact on economic and market conditions, and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the novel coronavirus," the firm added.

This lack of clarity for individual businesses, and the likely impact on overall economic growth in most countries, will no doubt continue to preoccupy GPs and their investors in the coming weeks – and keep risk management consultancies busy. Meanwhile, some could see unexpected silver linings, especially in the enterprise software area. Permira sold a further 22 million shares in listed remote working software company TeamViewer on the Frankfurt Stock Exchange in early March – a source familiar with the situation told Unquote that connections to the company from China have doubled in recent weeks during the coronavirus outbreak. And the aforementioned bank lender posits that less risk-averse GPs could potentially benefit from the market becoming less frothy: "If you don't mind taking a gamble, you could conceivably score assets at 6-7x in the current environment."

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