As a healthcare crisis Covid-19 is unprecedented in its global sweep and impact. As an economic event it presents us with a huge raft of what Donald Rumsfeld once called ‘unknown unknowns’, as questions are raised about everything from future consumer behaviours to the viability of international supply chains. We at DVC have been helping clients deal with ‘unknown unknowns’ since 1995, and believe therefore that we are in a unique position to advise the Private Equity industry in navigating the post-Coronavirus world.
In the short- to medium-term, the turmoil will have some negative impacts on the PE sector. Leverage levels for buyout deals will move downwards, and returns will take a hit as funds have to mark down their portfolios in the wake of declining public valuations. Exits will inevitably drop and the holding periods for assets will have to be significantly extended.
However, as has been widely observed, the PE sector is well-placed to take advantage of this developing situation. PE funds have an estimated $2.5 trillion in uncalled capital to spend, and their ability to manage portfolios actively, and to diagnose and mitigate problems in real time provides a significant competitive advantage. Banks will be dealing with defaults and working out how to assess risk, probably meaning they will back away from the buy-out sector, leaving a gap for private investors to fill.
A recent report on the PE sector by Bain consulting concluded that key to PE funds in navigating the Covid-19 pandemic will be sector expertise, and an increase in the scope of due diligence. This is true, but what does it actually mean? What does ‘sector expertise’ mean, and about what additional issues do funds need to be duly diligent in a world where everything has changed? We at DVC believe we can help.
The Way Forward
A key differentiator of between those firms who will perform best in the Covid-19 pandemic will be between those who panic – drowning under the current tsunami of information about the disease and its implications – and those who ask the right questions. Those who are able to sift through this information most effectively will be the ones to thrive first and strongest.
We at DVC don’t provide answers: we make sure our clients are asking the right questions. We believe that our mix of conventional and unconventional backgrounds – encompassing everything from branding to political economy – believe that we are different from other advisory firms in the advice we are able to provide to our clients.
From the perspective of the Private Equity industry, a key question in the wake of Covid-19 is how to value companies when everything you thought you knew about them, their sector, and the world in which they operate has changed substantially. Under normal circumstances, PE Funds, and the consultants advising them rely for valuations on access to vast networks of data which can be interrogated to provide insights into all aspects of an investee company’s business.
Yet the answers which emerge from ‘big data’ are only as good as the questions that are asked. What Covid-19 has taught us is that we might not even know what the questions are to which we need answers. The ‘unknown unknowns’ – to use Donald Rumsfeld’s term again – are myriad, for example:
- Viability of business models: Are business models we have long taken for granted any longer viable? For example, complex international supply chains have been devastated by Covid: might we see a move to a localisation of supply chains?
- Resource nationalism: Might emerging economies decide that it is more important to use what they produce domestically rather than export it? What might this do to the availability of a wide range of goods and commodities?
- Food security: A disease called ‘Tropical Race 4’ currently threatens the world’s entire banana supply. Similar diseases threaten many other crops. What does this imply for the way foods are grown and traded?
DVC can help PE firms ask the right questions to understand what ‘value’ looks like in a post-Coronavirus world. For each investee company we can work through, in a systematic fashion the risks and opportunities that are implied by the pandemic. This means that ‘big data’ can then be interrogated in an informed, focused fashion to provide robust valuations, and a clear understanding of how each company needs to operate in the future.
The article below is indicative of the types of issues we consult on.
About the author
Quentin Anderson is Executive Chairman, DVC Consultants and CEO and Co-Founder of BankTotal. He has decades of experience in advising companies, and for 18 years was a CEO of companies in the WPP group.
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DVC Consultants: Exploring unknown unknowns since 1995