GPs to extend the holding periods for PE assets

June 12, 2020

Ben Power
Investment Magazine

The Covid-19 pandemic was an unprecedented challenge for private equity (PE), with the crisis affecting most companies and spanning human resources, supply chains, liquidity and finances.

But StepStone Group partner, Suzanne Tavill, says the Covid-19 crisis has underscored the value private equity (PE) can bring to companies, though general partners (GPs) will need to continue their financial and strategic support.

“Never have GPs and company management faced a crisis that engulfed every aspect of their businesses so quickly,” Tavill says. “No one was untouched, and no business was immune from the shuttering of the global economy.”

While Covid-19 “fundamentally tested” the relationships between GPs and companies, Tavill says the longer-term nature of the relationships provided alignment that ensured parties “pulled together in tough times”.

In the trenches together

GPs were forced to respond swiftly as the crisis hit and ensure the continuity of operations. At the same time, they grappled with employee safety, including supplying personal protective equipment (PPE), transitioning staff to working from home and adjusting HR policies.

Tavill notes that many businesses saw their supply chains ground to a halt and GPs assisted in finding for alternative suppliers. Another major focus was staffing levels as companies grappled with legislative changes and support measures.

Permanent changes

Tavill says while there is likely to be a return to doing things as they were pre-Covid-19, the pandemic will drive two main shifts.

The first is greater use of on-line video calls. “There are plenty of meetings that can be effectively replaced by video calls, leaving the critical meetings for face-to-face engagement,” she says. “Globally, we are seeing a number of virtual AGMs and they’ve been quite effective.”

Secondly, more investors will come to recognize the importance of ESG considerations within their investment processes. GPs and LPs had been ramping up their focus on ESG factors over the past five years, but Covid-19 provided a testing case study for how GPs consider social factors in their investment process.

“Covid’s social implications have been all-encompassing, affecting everything from the needs of GP and portfolio companies to supply chains,” Tavill says. “This reality has pushed some GPs to address issues they may not have had to dig into before.”

“Covid led senior investment partners at GPs to take ownership of non-financial issues, which is critical in our perspective,” Tavill adds. “Responsible investment should not sit in a silo under compliance or legal counsel.”

Plan for volatility

The Covid-19 crisis has also highlighted the importance of planning and preparing for volatility, and Tavill says that GPs must plan for an ever more volatile world.

She notes the World Economic Forum cited infectious diseases in their top-10 risks in the coming decade but excluded it as a short-term likelihood, which highlights how difficult it is to plan for a specific risk.

A major specific risk is climate change. “We are not on a trajectory that sees temperature rise being held under a 1.5 degree Celsius as is being advocated for by the IPCC (Intergovernmental Panel on Climate Change),” Tavill says. “The financial implications of this are going to be massive. GPs and their companies need to understand the full range of outcomes they may face.

“Just like there was no place to hide from Covid, there is no country or economy that will be unaffected by climate change.”

Extending support

While there are signs we are over the worst of the pandemic, and green shoots of economic recovery are emerging, Tavill warns that GPs will need to continue to support their companies strategically and financially.

“We are not out of the woods yet,” she adds. “Most GPs will probably need to extend the holding period for their assets as maximising value for LPs from an exit may be difficult in the short term.”

Depending on where they are in a fund’s life, GPs might also need to consider creative forms of capital raising to support portfolio companies, such as GP-led secondary or preferred equity transactions, she says.

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