The Covid-19 pandemic and its grave consequences have had an unprecedented impact on economic activity. It is still early to assess its medium to long term effects. Nonetheless, I will seek to assess the short-term impact of this crisis on corporate finance activity, in the context of the North West.
Given the fall in demand in the second quarter of 2020, institutional buyers (including private equity houses) are still assessing its effects on their business portfolios. At the same time, the market volatility and uncertainty about the extent of the crisis, may delay certain buyers and sellers from making key decisions. The more bullish buyers still need to contend with tightened credit markets and different price expectations from sellers, most probably reluctant to sell at current prices. Consequently, M&A deals have reduced or been put on hold.
Prior to the pandemic, the North West was considered the most active and largest private equity market in the UK outside of London. Corporate finance activity in the region has been largely regarded as independent whereas activity in London and the South East has been historically more prone to market trends. However, over the course of the first quarter of 2020, there has been a reduction in the amount of equity deals that have been made generally into private companies across all regions of the UK.
In light of recent events, investors in private equity funds (mainly insurance, pension and wealth management funds) have significantly reduced their commitments to new funds and transactions as their overall investment portfolios are affected, broadly in line with the UK market. The initial effects of which have been felt more severely on industries which have been forced to close due to safety precautions implemented by the UK government. These include the hospitality, leisure and tourism sectors.
In contract, other industries have had differing experiences even within their own sub-divisions; this is particularly true in the healthcare sector. Whilst pharmacy activity continues to progress, Covid has – of course – dramatically impacted on care homes and their multiples.
However, with uncertainty reducing, private equity players will re-focus. They have the capital to invest, and will benefit from lower prices and less competition from strategic acquirers – who may concentrate on re-building cash balances.
The pandemic has placed an unprecedented strain on the ability of businesses to service their debts and financial obligations, including paying salaries, rents, loans and taxes. Although the UK governments have provided a measure of relief through aid packages, the results are still to be measured – the 31st August may be a key date for that.
Moreover, sectors such as oil and gas, airlines and cruise lines and leisure as well as high street retailers are being hit harder than others. Although most businesses are expected to return to some form of normality once the pandemic has subsided, many will not. Nevertheless, many of these surviving businesses will need some form of relief on their debt obligations in order to avoid triggering defaults. Debt renegotiations are inevitable.
Hopefully, banks will be proactive in working with clients to avoid cessations. It is also worth mentioning the role that private debt funds could play in this crisis, especially in developed markets. They may seek out opportunities to provide bridge financing with an attractive risk/return profile (more costly for companies), and may also engage in convertible loans, which seek control over companies in distress.
To conclude, M&A activity has stalled but should pick up as soon as uncertainty drops, with a key driver being private equity funds. However, at the time of writing – and subject to a second wave – there do appear to be green shoots of recovery as deals are being revived. One of the lessons learned from the last decade is how tentative economic confidence can be in the UK. The hope is that this confidence can be sustained – albeit with appropriate institutional assistance.