Private equity on the prowl for distressed companies

With the Covid-19 crisis and the emergent global recession driving down acquisition prices, private investors look set to make use of the buyer’s market sooner rather than later. According to a new study, investors are currently sitting on a record £1.1 trillion cash pile, while almost four-in-ten such firms have come across distressed or accelerated opportunities due to Covid-19 that interest them.

With the coronavirus having pushed many of the world’s economies to the brink of recession, the consulting industry has been rocked by the current crisis. With clients delaying projects, decreasing their scope or cancelling them all together, the revenue of the global and European consulting market is set to decrease drastically by the close of 2020. However, not all firms look set to be hit in the same way.

According to recent analysis of the consulting market, consultants working with private equity will be less badly impacted. Private equity firms may be cautious in the short-term, but as valuations fall it will give them opportunity to cheaply buy companies, turning to consultants for advice and transaction support amid the coming feeding frenzy. As the lock-down across Europe eases, new research from consulting firm Mazars appears to have supported this theory.

June has seen many non-essential businesses re-open with less government support to keep them afloat, and vultures have quickly begun circling ailing firms across Britain. According to Mazars’ survey, two-thirds of private equity firms said they are assessing deals to buy distressed companies. The researchers suggested that this indicates many willing to search beyond their usual investment criteria as they hunt for bargains.

Covering more than 150 investors in Europe, the Americas and Asia, the study showed that 82% of investors expect a slow ‘U-shaped’ recovery instead of a swift economic bounce-back. Even more ominously, one in 12 private equity investors anticipate the economic picture getting even worse and are preparing for a “double-dip” recession. In spite of that, with private investors – including sovereign wealth funds and leveraged buyout firms – sitting on a record £1.1 trillion cash pile, they seem to be itching to unleash it in the coming months, as volatile markets present opportunities to make big gains.

When asked if they were still ‘open for business’, Mazars found a strong consensus that private investors expected to maintain “business as usual” through the current crisis. A massive 74% responded that they will not only continue looking for opportunities but that they are very much open for business in the immediate term. The exact same percentage told Mazars that while concluding deals working from a home environment could be challenging, it was something which could be achieved.

With the current financial impact of the pandemic and its correspondent economic downturn on many businesses, 66% of respondents said that they would be interested in opportunities to invest in distressed companies. While 28% of such respondents said they are yet to see any distressed opportunities, 38% said that they had come across distressed or accelerated opportunities due to Covid-19 which they are looking into.

Interestingly, despite more than six-in-ten respondents said they would be interested in distressed opportunities, only 7% of Mazars’ respondents manage a typical turnaround fund. According to the analysts, that suggests that investors are willing to look outside of their normal criteria in the current environment. At the same time, it does offer up the opportunity for private equity firms to participate in a heightened amount of asset stripping – as they might be able to buy companies for a relatively low price, before selling on their remaining assets at a profit, and allowing the remaining firm to lapse into administration.

Paul Joyce, head of London M&A at Mazars, said, “The findings confirm investors are open for business, but these are still testing times… While it appears exit horizons for existing portfolio assets may well be delayed, many existing funds remain highly liquid and they continue to look for new platform deals and ‘bolt-ons’ for their portfolio companies. As during any period of uncertainty and difficulty, there also remains opportunity.”