Following our recent webinar “After the Outbreak: How Will the COVID-19 Outbreak Impact the Future of PE Transactions in Asia?” we surveyed legal and investment professionals from private equity funds that are based in or that have significant investments in Asia.
We have summarized the results of the study into five key findings to provide a snapshot of the current and long‑term impact of the COVID-19 outbreak on PE investments, the management of portfolio companies and the business operations of private equity funds.*
Five Key Findings
1. Investment into China following the COVID-19 outbreak remains high
- For the majority of respondents, their investment into China in 2020 will remain the same, or even increase, in light of the COVID-19 outbreak.
- There is confidence in the market, despite the outbreak, which could lead to a significant number of deal closures in the latter part of 2020.
- However, for funds with a global reach, the pace of investment into Asia as compared with investments in the United States or Europe, may depend on how long “shelter in place” restrictions for investment professionals remain in each jurisdiction. A faster recovery in Asia could lead to a larger amount of investments being made there.
2. Three sectors are likely to attract interest post-outbreak
- Healthcare, Technology Solutions for Online Business Migration, and Pharma R&D are the top three sectors most likely to attract increased interest from PE funds in light of the outbreak.
- We expect to see more healthcare transactions involving PE sponsors teaming up with strategic buyers. In particular, sponsors are likely to seek to leverage partnerships with existing healthcare players to navigate regulatory requirements, including new opportunities arising from government subsidies or incentives in the healthcare or pharma sector.
- Such partnerships often help sponsors distinguish themselves in competitive bid processes and give sponsors access to additional capital so that they can afford higher valuation multiples and execute bigger deals. These partnerships also provide a readily available exit opportunity (e.g., put/call) for the sponsor in the future when it sells down its stake to its local partner.
- For more on the opportunities within the health and education, please read our client alert “PE Trends in the Healthcare and Education Sectors in Asia”.
3. Bridge financing is the most pressing requirement for portfolio companies
- Respondents tell us that the most pressing needs of portfolio companies are bridge financing, followed by supply chain management and diversification, and establishment of crisis management committees.
- In light of the large number of businesses requiring additional capital to help them weather the COVID-19 outbreak, we expect this shift in focus to impact not only terms of new investments but also follow-on investments and bridge/emergency financing.
- Portfolio companies may seek to draw down existing revolving credit facilities, but drawdown conditions may entitle lenders to refuse to fund/rollover. For example, no “Material Adverse Effect” or other “Default” or (in the case of rollover loans) no other “Event of Default” has occurred.
- Portfolio companies may be tempted to drawdown existing facilities in full to mitigate the risk of lenders refusing to fund. However, lenders can refuse to rollover the loans so portfolio companies are likely to select the longest interest periods permitted.
- Extensions of existing facilities or new bridge financings will need to be carefully negotiated in anticipation of the current outbreak persisting (e.g., negotiating sufficient headroom in financial covenants to take into account expected impact on manufacturing operations and reduced consumer demand).
4. The outbreak will have an impact on pre-investment due diligence
- Business continuity planning and insurance (40%) as well as structuring downside protection (30%) are the two areas of pre-investment due diligence and analysis that respondents believe will most likely be impacted by the outbreak.
- In the future, investors should pay extra attention to a target’s resilience against business interruption and other unforeseen risks and secure protection to avoid or mitigate risks.
- Some possible downside protection mechanisms include: exit rights that allow the investor to dispose of its interest in a downside scenario (such as put/redemption rights), valuation adjustment mechanisms that automatically increase the investor’s shareholding on the occurrence of certain events, and enhanced governance rights that take effect upon the occurrence of a triggering event.
- Look out for our upcoming article on weathering down rounds and practical approaches to structuring downside protection.
5. There will be a change in the way deals get done
- Respondents anticipate a long-term decrease in the amount of business travel by investment professionals and a long-term increase in the percentage of interactions with counterparties conducted via videoconferencing and phone. This will lead to more deals being conducted entirely using virtual technology.
- Fewer in-person interactions with target company management teams could result in a greater risk of fraud and compliance issues. A growing dependence of videoconferencing and other digital means of interactions bodes well for companies that provide digital solutions to businesses.
How MoFo Can Help
- MoFo offers a range of Zoom-facilitated trainings for clients during the outbreak. Please contact Marcia Ellis if you would like to discuss a training session for your team.
- Subscribe to our PE Briefing Room to stay abreast of hottest topics in the global PE space.
- Subscribe to our Coronavirus (COVID-19) Resource Center for the latest legal and business advice as this global health crisis continues to quickly evolve.
*67% of the funds surveyed are headquartered in Asia, with over US$1 billion in AUM respectively. 23% of the respondents come from funds with over US$20 billion under management.