In Part I of this article, we discussed the possibility of PE investors, their portfolio companies, or their respective counterparties invoking material adverse change (MAC) or force majeure (FM) clauses to be relieved of their existing obligations due to the COVID-19 outbreak. In Part II of this article, we set forth (a) our recommendations for how PE investors should work with their portfolio companies to respond to the immediate and long-term impact of the COVID-19 outbreak and (b) our expectations as to how future PE deals in China and the rest of Asia will be impacted by the experience gained during the COVID-19 outbreak.
In Part III of this article, we briefly discuss some of the sectors that we believe will emerge stronger from the COVID-19 outbreak and may provide attractive post-COVID-19 investment opportunities for PE funds.
- Technological solutions to reduce reliance on physical interaction. In the effort to contain the outbreak, transaction stakeholders have been discouraged from having face-to-face meetings and from undertaking any travel. To mitigate the impact of similar restrictions in future outbreaks and other unforeseen disruptions, businesses will likely plan to increase the adoption of technological solutions to create viable alternatives to in-person interaction, thus creating opportunities for providers of such technology. Companies that provide these technological solutions will need injections of cash from PE funds in order to expand their businesses to take advantage of this increase in demand.
- Private hospital and clinics, pharma or biotech companies and start-ups.
- It has long been widely believed that the public healthcare system in China is insufficiently resourced to address all the needs of its massive population, and the urgency to add more qualified medical staff, well-trained doctors, and medical facilities has become even more apparent during the COVID-19 outbreak. At the same time, online healthcare platforms such as Ping An Healthcare and Technology reported a surge in the number of new users amid the COVID-19 outbreak. The desire generally for a broader private healthcare network and more credible online medical consultation platforms to provide more efficient and convenient diagnosis and treatment is expected to drive growth in that sub-sector. We see continued interest in healthcare, and in particular online health platforms, in Southeast Asia as well.
- Global production by pharmaceutical companies will be severely disrupted if many Chinese-made essential ingredients are not readily available due to the suspension in production. The market demand generally for more stable supplies and development of more effective drugs would encourage more collaboration between the private healthcare sector and startups in the search for more advanced diagnostics and treatment for viruses, and more bolt-on opportunities. PE-backed pharmaceutical companies with production largely located in China may seek to reduce their geographical risks by securing production capabilities in other countries.
- For other trends that we see in the healthcare sector, please see the briefing on PE investment trends in the healthcare and education sectors in Asia that we will be issuing shortly.
- Food safety. With SARS, Avian flu, H1N1, and COVID-19 all originating from animals, the Chinese government will likely evaluate its meat production and distribution system and explore restructuring options that would potentially favor large-scale animal farming. It has been reported that the Chinese government is approaching larger and state-owned meat importers and offering them the opportunity to set up state-of-the-art meat and animal processing factories in China, and it is seeking advice from specialists in setting up meat processing production lines in compliance with international best practices for food safety. There may be ample opportunities for PE funds to collaborate with these established players to identify qualified food safety control or test providers that would stand to benefit from the potential restructuring.
- Alternative-protein producers. The combination of such respiratory illnesses and the rising preference for clean meats may drive even more consumers to consider alternative sources of protein such as plant-based meat substitutes. Most of the investments in this space so far have been early-stage investments by venture capitalists and family offices, but the space may see more PE investments following the outbreak.
- E-commerce – grocery, meal, and other delivery services. Online grocery, meal delivery, and other shopping platforms have been flourishing as people in affected areas are forced to stay home during the COVID-19 outbreak. Even residents of less affected areas have exhausted different e-commerce platforms to purchase face masks, goggles, latex gloves, sanitizers, and other related products. After the outbreak recedes, we expect that some consumers will prefer to continue relying on the convenience of such services. In the long run, the COVID-19 outbreak could accelerate the transition toward online purchases and boost swifter expansion of online retailers and other players in the consumer sector that adopt online strategies better than their peers. Existing e-commerce and delivery services will likely need cash injections from PE investors to fund changes required by beefed up business continuity plans that will allow them to take steps to continue operating while ensuring the safety of their employees during events such as the COVID-19 outbreak.
- Manufacturing and logistics. Businesses in all sectors ranging from pharmaceuticals to automobile manufacturing involving supply chain have felt the effect of the suspension and termination of factory production in China. They are already seeking to diversify their supply chain and will need cash injections from PE investors to effect these expansions, which will drive transactions in these verticals.
- Data centers and data security services providers; privacy law issues.
- Concurrent with the expanded demand for e-commerce and online healthcare platforms (discussed above), as well as governmental plans to increase exchange of medical information to allow swifter responses to future outbreaks (discussed below), we expect that the data center industry will also benefit from the surging demand. PE investment in this sector had already ramped up over the last couple of years and this is likely to continue to be a very hot sector – we are seeing several PE transactions involving Asia data centers continue uninterrupted despite the COVID-19 outbreak, unlike transactions in other sectors.
- As data centers handle an increased volume of data, concerns over data security and privacy protection will increase. Data security service providers that can offer solutions in compliance with international best practices may benefit from the increased focus of the business on implementing the appropriate measures. Data security is likely to be another hot sector in the aftermath of the COVID-19 outbreak.
- In China, the relevant local and provincial governments and centers for disease control and prevention have been blamed for failing to react adequately to the outbreak. It is now well recognized that inadequate epidemiological information about the disease hampers the prompt application of effective control measures. The Chinese government and other governments may, as a lesson learned from this outbreak, look into strengthening the exchange of epidemiological information with respect to infectious diseases and the possibility of having the ability to collect necessary data from private institutions swiftly to respond to future outbreaks such as by detecting early symptoms and infection pattern. In China, this may impact the formulation of the upcoming data privacy law that had been expected to be promulgated late this year – while it had been expected that the anticipated new law would follow the principles of the European Union’s GDPR, it is possible that the promulgation of the new law will be delayed by the COVID-19 outbreak, the desire of the Chinese government to consider how data privacy legislation will impact the ability of various organizations within China to quickly share data in an emergency situation and, at the same time, the need to ensure the anonymity of the people in the data collected is protected to avoid unnecessary panic and social stigma. It would be reasonable to expect other nations to reevaluate their data privacy laws in the same vein. PE investors should be aware of any such regulatory developments to the extent they impact the storage and handling of data by their portfolio companies.
As further explained in the Terms / Notices linked below, the information provided herein does not constitute legal advice. Any information concerning the People’s Republic of China (“PRC”) is not intended and shall not be deemed to constitute an opinion, determination on, or certification in respect of the application of PRC law. We are not licensed to practice PRC law.