Private equity resilience amid market uncertainty
The uncertainty brought on by the rapid spread of COVID-19 is creating unprecedented economic, operational, and social challenges for businesses across the globe. The private equity sector faces its own share of disruption as employees transition to a remote work environment, portfolio companies face liquidity constraints, and economic uncertainty interrupts deal processes. However, an economic downturn also holds opportunities for a private equity industry that just came off record fundraising years and still has significant amounts of undeployed capital. The challenge will be balancing the viability of existing investments with opportunities to deploy new capital, leverage low interest rates, and take advantage of lower valuations.
Long-term industry fundamentals for private equity firms remain attractive. Many private equity firms are well positioned to capitalize on investment opportunities while adapting to a new normal. For current and upcoming deal processes, cash flow projections and business continuity/recovery plans are expected to become key focus areas as lenders and private equity buyers alike look to gain comfort over target companies’ liquidity and downside scenarios.
Understanding the cash flow health at existing portfolio companies will be a critical factor in the private equity sector’s ability to weather the recent economic downturn. Firms and/or their portfolio companies may wish to consider performing a stress test of various triggers, such as liquidity, transformation, turnaround, financial restructuring, and insolvency. The Great Recession proved that the private equity sector can perform through economic downturns. With adequate planning and preparedness, private equity firms should have opportunities to grow through the COVID-19 turmoil, despite the uncertainty of the current economy.
Additional KPMG Insights
KPMG’s Global Head of Insurance, Laura Hay, discusses how a global pandemic is likely to put a spotlight on insurers, who can expect to be inundated with general inquiries and claims across multiple different lines of business, while also adapting to a remote workforce environment. This article elaborates on how the insurance industry is likely to shape up amid the unfolding crisis, the potential implications across different segments of the industry, and what longer-term trends the COVID-19 outbreak may usher in for the future.
Regulators are looking for financial services companies to demonstrate that they have pandemic preparedness plans in place and that the plans have been activated and are working. These plans must address resilience to market volatility, technology, operations (including products, third parties, and employees), customer/investor protections, and regulatory compliance. This publication addresses recently regulatory actions and focus areas and related considerations and preparative measures for financial services firms.
Both buyers and sellers are increasingly using advanced analytics to assess deal value. Sellers are leveraging analytics to present themselves on a full “investment” pro forma basis. While the inclusion of more detailed adjustments has increased pro forma adjusted EBITDA when compared to reported EBITDA, buyers have also utilized analytics to challenge the adjustments presented. KPMG explores the various types of adjustments that have been impacted by the integration of advanced analytics into companies’ valuations.
KPMG’s new thought leadership report draws on the experiences and insights of over 100 tax and finance leaders to uncover ways dealmakers can improve the odds of M&A success in the post-tax reform era. The report provides critical insights on the key tax issues facing dealmakers, how to incorporate new provisions into modeling and structuring, and what new skillsets are needed to add value at each stage of the transaction process.