Navigating the “COVID Blip” and Its Impact on Your Target Acquisitions

Woman wearing mask while sitting in office typing

The COVID-19 pandemic has significantly disrupted capital markets in a variety of ways over the past year and a half as the world navigates the global economic impact. According to research by Harvard Law School, on average, 50% of PE firm portfolio companies are affected positively or unaffected by the pandemic, 40% are somewhat negatively affected and 10% are severely negatively affected.

As a private equity group, your organization has likely encountered new and difficult roadblocks caused by the pandemic, as well as discovered more productive and efficient strategies created by changes in business.

For better or for worse, the pandemic has caused a “blip” in investment, acquisition or merger pursuits as a private equity group (PEG). Despite the unique economic circumstances in the world today, there are strategic and forward-thinking ways to navigate the pandemic’s impact on target acquisitions.

Think Realistically and Strategically About Target Acquisitions.

Before the pandemic became a crisis in early 2020, the world was a different place. Remote or hybrid workplaces scarcely existed, firms incurred extensive travel and face to face meetings were held to evaluate a target acquisition.  Since then, online advisory services and meetings have become the norm. Additionally, employee burnout and the importance of mental health was not as prominent of a conversation within corporations as they are today.

One recent change is just beginning to impact corporations across the country. President Joe Biden released a COVID-19 Action Plan in early September 2021, which mandates all companies with over 100 employees must require vaccinations for all workers. While we are still in the early days after the announcement of this strict new mandate, it is difficult to tell how it will impact corporate culture, employee retention, and overall operations of organizations, particularly portfolio companies of PEGs.

Private equity groups of all sizes are including new factors when evaluating new investment opportunities, new business models and remote management teams. In an era of uncertainty, companies must have a strong internal foundation — both structurally and talent-wise — because so many external factors can change suddenly due to the nature of the pandemic.

Examine each factor of your current and target acquisitions: talent, leadership and management structure, digital capabilities, cybersecurity protocols, supply chain operations, cash-flow forecasting, and other critical financial projections, all of which may impact top line revenue or EBITDA margin.

The key to remaining strong as a PEG in this moment lies in the ability to pivot quickly to recognize new opportunities. For example, one fund acquired a t-shirt printing and manufacturing company shortly before the lockdown in March of 2020.  Fund managers and their sponsor executives quickly re-tooled their manufacturing and logistics and began making cloth masks –   a big win with positive margin results.

On the other end of the spectrum, it may seem appealing to wait out possible deals until the world has steadied – and in some cases, it is the wiser option – but a testament to your expertise as a sponsor organization is a willingness to strengthen your portfolio and adjust in uncertain times.

Adjust to and Normalize COVID-Era Income

New interventions and changes, such as state or federal government aid, caused by the pandemic are impacting the market and valuations. Buyers may also find it difficult to enlist the support of acquisition target’s shareholders who may otherwise be occupied dealing with the effects of COVID-19.

For existing sponsor backed portfolio companies that have been severely affected by the pandemic, there are several changes investment groups can make to lessen the harm, such as modify or augment head counts, invest in better technology, and reduce costs. Rather than immediately opt to exit a transaction with significant economic damage caused by ripple effects of the pandemic, many PEGs are creatively attempting to overhaul the issues from the inside out.

This includes new bolt-on verticals, considering additional funding alternatives, restructuring debt, reorganizing internal management, fully optimizing ERP systems for their highest and best use, and assisting portfolio company leadership in managing the next few quarters.

Though the pandemic has thrown unexpected curveballs at the entire economy left and right, it is clear that PEGs are working smartly, but not necessarily quickly. When deals seem to go south and an investment is not bouncing back as swiftly as others in the portfolio stack, fully consider the bigger picture before making the decision to amend the investment thesis. Given the incomprehensible systemic global impacts of the pandemic, many aspects of the economy are transforming, or starting completely anew.

How Bridgepoint Can Help

The unprecedented nature of the past year and a half has left much of the PEG industry attempting to make the best decisions, but oftentimes, enlisting the help of a professional financial consultant is the best call. At Bridgepoint Consulting, our team is made of industry professionals across all sectors of the financial and investment world and who have years of relevant experience. Our expert consultants are prepared to help with your fund management and to help optimize EBITDA.

As a trusted partner for private equity firms, we know there is nothing more critical than realizing perceived deal value during the critical 100 days after a deal close. Our consultants will support you with asset-optimizing private equity advisory services to make tactical decisions amid current economic circumstances.

Curious about how our consultants can assist your financial organization? Reach out today.