PE examines portfolio liquidity options as coronavirus halts dealflow

Managing financial and liquidity risk is at the front of their minds, the managers and advisers told Mergermarket, as they fret over the potential impact of a severe downturn.

Some firms have told their management teams to fully draw revolving credit facilities (RCF) if they are available, and sit on the cash in case of a squeeze on liquidity, according to one private equity manager.

Since 1 March, around 130 publicly traded companies have drawn more than $124bn (£101bn) under RCFs, according to press reports.

"GPs appear to be managing their liquidity options in various ways," says Michael Zornitta of Investec. "They are either paying down facilities early to ensure there is headroom and availability when it may be needed further down the line, or fully drawing down on committed facilities now, to ensure that cash is available."

Although sponsors will put off equity injections until they have exhausted other options, some are putting the necessary pieces in place in the event that they run out of debt facilities, several private equity executives said.

Those without the dry powder will have to look to other options, including asking limited partners to draw on later vintages, despite the conflicts of interest that creates, a second adviser predicted.

In the most extreme cases, private equity firms are already expecting portfolio companies to go under, according to the first executive. "We are seeing the first ones starting to slip," he said of his own portfolio. "It's only been a few weeks and it's not going to kill anyone yet, but looking ahead six months we have assets that are 6-7x levered that won't be able to sustain a bump on the road," he added.

In the sectors that have borne the brunt of the crisis, companies should consider setting up a dedicated "cash war room", according to a report by McKinsey.

Sponsors should focus on assessing risk and potential cash savings, identifying cash levers, and collaborating with business leaders and outside experts, the report said. 

Portfolio A&E
Across the board, private equity firms are redeploying resources from deal origination and investment to support the portfolio, the deal-makers said.

Dealflow has all but evaporated across the continent as processes are pulled due to the uncertainty in the market, the deal-makers said. Some advisers in both the primary and secondaries space have reported that 90% of their M&A mandates have been put on hold, according to Investec.

Last week saw the postponement of sale processes across a variety of sectors and geographies within Europe, including those of Iberia-based crop protection producer Rovensa and Dutch healthcare provider Bergman Clinics, according to Mergermarket reports.

Instead, deal-makers are scenario-planning, helping companies to understand their cash reserves and prepping them for lender meetings, according to a third private equity manager.

First and foremost, sponsors are helping portfolio companies to manage infection risks, a fourth investor said. Then they are supporting them with customer shutdowns and order cancellations, and issues with the supply chain, he added.

Once private equity firms secure short-term liquidity they will focus on cost-cutting measures, according to a restructuring adviser.

"They will lay off flexible workers first, then there will be redundancies and then they will let go of loss-making divisions, which could lead to 'dowry transactions'," he said.

Government support
Sponsors are also getting to grips with the numerous government interventions being brought in to support the economy, and disseminating best practice across their assets with portfolio-wide briefings, the third investor said.

The UK Treasury has committed to paying 80% of the salary of furloughed workers, introduced tax holidays, state loan guarantees worth £330bn, and support for struggling retailers and pubs in a £350bn support package.

"The government is clearly listening," a UK fund manager said. "The tax relief, for example, will help in the short term and the job retention policy is also welcome. But the loan scheme is administered through a banking system that's hugely stretched. They haven't yet put in place a package that will stop all good businesses going under."

The Business Interruption Loan Scheme is only available to businesses with less than £45m revenue and the Covid-19 Corporate Finance Facility is only available to investment-grade businesses, leaving mid-market companies without access to capital, according to Clearwater International.  

In Germany, businesses are looking to the kurzarbeit system of partial unemployment, tax postponements and the benefits system to help tide them and their employees over the worst. The government has relaxed the rules for putting workers into short-term work, where the state pays 60% of an employee's wages. 

Some German private equity firms have centralised coordination of administering those measures across the whole portfolio, one executive said.

In France, sponsors are also looking at how they can place employees into partial unemployment while they are unable to operate, a French fund manager said.

This article was originally published on Unquote sister publication Mergermarket

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