According to a recent survey of 780 entrepreneurs and business executives, 87% expect COVID-19 to have at least some negative impact on their company’s operations and financial position. These are stressful times for startups and mature companies. Sales are tanking. Cash is running out. Economists are warning of a deeper recession ahead, and there’s no clear visibility on when things might get better.
Amidst this chaos, a select group of well run, forward-looking Private Equity (PE) firms, such as New York based Lincolnshire Management, have stepped up to help their portfolio companies ride out the Coronavirus crisis through a host of measures which include taking care of employees, shoring up cash balances through additional investments, assessing risks, and strategizing on sales and operational adjustments.
Small Private Companies Hit Especially Hard
Across virtually all industries, companies are seeing revenues drop sharply as customers curtail spending, delay purchase decisions, and conserve cash to weather this crisis. With global and domestic bans on travel, government-mandated closures, and social distancing rules, operators in the Business-to-Consumer (B2C) sector have been hit especially hard – airlines, tourist attractions, restaurants, and small businesses that mainly cater to consumers. Business-to-Business (B2B) companies too have felt the ripple effects of a Covid-19 induced global meltdown.
In addition to steep revenue drops, corporate costs are rising as rents and miscellaneous operating expenses remain payable while companies also invest in work-from-home (WFH) equipment, technologies, and platforms.
With this double whammy of dropping revenues and rising expenses, cash burn rates are rising, as is the specter of imminent bankruptcy, especially at those startups and privately-held small and medium enterprises (SMEs) that do not have adequate cash reserves to ride out this economic downturn.
Private Equity to the Rescue
To combat this unprecedented economic meltdown, the government recently passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which, among other things, includes the Paycheck Protection Program.
Unfortunately, Private Equity (PE) portfolio companies aren’t generally eligible for economic hardship relief funds, such as the Paycheck Protection Program. This is where conservatively run, forward-looking private equity companies are stepping in to fill the void.
For instance, Lincolnshire Management, which invests primarily in middle-market businesses, is taking a holistic view to helping its portfolio companies ride out the Covid-19 induced economic downturn. Executives there recognize that time is of the essence, so they are acting urgently and decisively to reduce operating costs and shore-up finances, while still taking care of employees at their portfolio companies.
Lincolnshire’s ability to help its portfolio companies ride out crises such as the 2008 crash and the current Coronavirus downturn hinges on its disciplined approach – only making investments where valuations are reasonable so they do not overpay, and keeping debt levels low so there’s an adequate margin of safety to service debt even through periods of reduced revenues.
In addition, Lincolnshire Management deeply understands the operations and industry dynamics on each of its portfolio companies. It uses an objective, metrics-based approach to track finances, operations, employee productivity and supply chain performance.
TJ Maloney, Lincolnshire’s CEO, attributes this conservative, hands-on approach to being able to quickly identify variances and take corrective action to minimize damage from the Covid-19 crisis.
Boost Communications with Portfolio Companies
In such dire times, private investors have boosted communications with each of their portfolio companies to get a clear view of employee wellbeing, product/service demand, sales trends, AP and AR management, plasticity and elasticity of operating expenses, projected cash flows, contingency plans, need for additional funding, etc.
PE companies have also taken to hosting virtual fireside chats so portfolio company CEOs can share ideas and solicit input on how to get through this crisis. In addition, firms are leveraging their network of contacts, industry experts, and partners to help portfolio companies wherever possible.
Understand the Risks and Opportunities for Each Portfolio Company
To quickly adapt and hunker down to ride out this global economic downturn, PE investors are assessing and managing risks across four major areas:
- Product/Service Demand-Side Risk, and revenue impact;
- Supply-Side Risk, and production/operations impact;
- Liquidity Risk, and working capital ramifications; and
- Other risks, such as key employee departures.
After carefully, but quickly, assessing each portfolio company’s risks in quantifiable terms, Private Equity and Venture Capital investors are urgently helping management make strategic, operational, and financial decisions for each company.
In some cases, firms such as Lincolnshire Management are evaluating opportunities to boost market share where competitors are floundering, and are also keeping an eye out for possible white knight acquisitions.
Quickly Adapt to Changing Circumstances
Coronavirus is the black swan of 2020. With disruption of this speed and magnitude, management must revise prior assumptions and projections, and make fast and decisive adjustments to changing circumstances. As Darwin said, those who survive are not the strongest or the most intelligent, but the most adaptable to change
Accordingly, what seemed like a really viable product or service six months ago may no longer look as good in a post-COVID economy.
Some portfolio companies could well be thriving with consumers and businesses under lockdown; others, with fundamentally relevant products and services, may be experiencing temporary delays; a few may need to pivot their plans to adapt to a changed world; and a handful may no longer have long-term viability.
After understanding the risks from changing circumstances, PE investors such as Lincolnshire Management are faced with making difficult choices on which companies to support, which ones to pivot, and which ones to cut down, shut down, or leave to fate and CEO chops.
Prioritize Capital for Follow-On Funding over New Rounds
At such times, portfolio protection and management should be the #1 priority for private investors. Accordingly, investors should err on the side of safety, and prioritize more capital for follow-on funding of existing portfolio companies, relative to capital for new investments.
With uncertain times ahead, consider the worst-case scenario, and try to give your portfolio companies at least 12 months of working capital.
Take Care of Your People
With revenue growth rates slowing, and cash burning fast, companies understandably need to slash expenses. In such times, it’s important that investors and CEOs be compassionate, and consider the human angle.
Investors should open up their wallets to fund salaries, and explore alternatives such as reduced working hours or temporary furloughs with subsistence pay, so employees can get through this crisis in a humane manner.
In place of headcount, companies should look for other places to cut costs. For instance, with sales softening, this may be a good time to slash your marketing budget or capital spending plans, or freeze new hiring while boosting employee-intensive R&D to foster innovation for the post-COVID world.
Consider this an investment in corporate social responsibility, which will undoubtedly benefit your fund and your portfolio companies over the long run through favorable public perception, and higher employee loyalty, engagement, and productivity after this crisis passes.
