Private Equity Firms Strive to Develop COVID-19 Recovery Plans in an Uncertain Market
August 12, 2020
Author: Ashik Shah
Given the ongoing effects of COVID-19, private equity firms are focusing their attention on how to handle funding and raise capital from their investors in a market that could face even more change due to uncertainty surrounding potential additional waves of COVID-19 cases and government-mandated lockdowns. Private equity funds seeking to raise capital in the next 12-18 months will need to prepare reports for rolling cash forecasting in various time periods (e.g., immediately, near term and long term, etc.). These forecasts will help portfolio companies discern whether they will need more capital and also enable them to predict what their future financial standings will be.
In addition, COVID-19 has greatly affected many private equity firms’ exit planning and timeline models. For example, portfolio companies that may have been doing well before the pandemic may now be facing decreases in profits and revenue while, alternatively, companies that have been able to thrive in the COVID-19 environment (e.g., lumber companies, bicycle manufactures, etc.) might be on an increased timeline to sell.
Furthermore, management incentives that are typically provided by private equity firms to a portfolio company’s key management team may need to be reevaluated. For example, incentive plans that are related to performance thresholds may not be as appropriate in the near term given possible outdated projections and general uncertainties related to COVID-19. Therefore, private equity firms will have to start thinking of creative ideas or alternatives on how they can provide management incentives for portfolio companies to achieve their revenue and business goals.