May 27, 2020

Private Equity and the Pandemic: Industry Update

By Andrew Finkle, Partner, Advisory Services & Jeffrey Zudeck, National Leader, Private Equity& TAS Groups

Private Equity and the Pandemic: Industry Update Private Equity

Private equity deal flow slowed significantly since March, when the country began to close down under governmental orders, due to the COVID-19 crisis. Similarly, PE exits also slowed.

Dry powder remains at all-time high levels (approximately $740 billion according to PitchBook). Further, fundraising maintained modest levels of activity, as LPs still see the benefits of greater PE returns compared to the public market when the economy rebounds.

Lending remains uncertain. While the Federal Reserve instituted emergency rate cuts at the beginning of the crisis in mid-March, access to senior lending capital appears to have tightened as lenders prepare for credit deterioration. Many deals priced in January through early-March continued towards the finish line to closing, where lending was in place. Deals brought to a lender in late-February or subsequently were generally subject to different lending terms than originally negotiated or were temporarily placed on hold until the credit market opens back up.

According to PitchBook, fundraising should be expected to fall significantly from the 2019 peak and may not recover until 2021.

Valuations were at historically high levels prior to the COVID-19 crisis. Sellers may temporarily take companies off the market in affected industries where valuations fall or where sellers are simply too distracted by the pandemic and uncertain economy.

The economic crisis caused by the coronavirus pandemic has affected certain industries more than others. Industries hardest hit include food & beverage, traditional retail, travel, and hospitality.

The U.S. government has stepped in to provide multiple phases of emergency legislation for businesses and individuals to provide both economic stimulus and financial relief. Relief for businesses includes:

  • SBA loans for small businesses, including Payroll Protection Program loans (which has a forgiveness feature, though heavy scrutiny is expected for PE portfolio companies under the current guidance), Economic Injury Disaster Loans and the Main Street Lending Program;
  • Payroll tax deferral, tax credits for sick leave and emergency leave, and employee retention tax credits; and
  • The relaxation of rules imposed by the 2017 Tax Cuts and Jobs Act (TCJA), including expanded use of net operating losses (NOLs), easing of the business interest expense limitation, and property eligible for 100% bonus depreciation.

Congress is working on a record new stimulus package as of this writing. States are also beginning to open for business, and COVID-19 testing is becoming more widely available. A vaccine appears at least 6 to 12 months away.


The long-term outlook for middle-market private equity firms remains bullish, though the number of deals in the short-term may significantly decrease. Many private equity firms have weathered past crises and recessions, and they took away valuable lessons as a result. PE firms continue to execute their investment strategies and look for alternative ways to source deals and capital. Likewise, LPs do not want to miss the rebound and are investing in the private markets. Dry powder is at all-time high levels. Accordingly, those PE firms with committed capital are well positioned to take advantage of any dips in valuations based on the impact of the pandemic. Assuming that the U.S. is past the pandemic by the summer, the third and fourth quarters of 2020 look to be a busy time for dealmakers.


Stay Connected

Utilize the “new” means to communicate. Use Zoom, WebEx, Skype or another platform to connect with prospects, lenders, and funding sources. Just because we cannot connect physically does not mean that we cannot connect at all. Those who remain proactive will reap the rewards. To that end, reach out to prospects as you normally would and ask how the crisis affects them. Help build a strong, long-term relationship with your commercial lenders to ease their fears and discuss short-term options. It is also important to keep in close communication with your portfolio companies and guide them through the crisis. It is more likely that the PE firm has weathered prior crises than the portfolio companies’ management, and they can learn from your experiences and advice.

Valuation Considerations

Based on the historic rapid drop in overall business production during the shelter-in-place and stay-at-home orders, changes or supplements of the adjusted EBITDA valuation model may be necessary to determine proper pricing and future expectations. Some commentators speculate that the 2020 crisis may resemble the 2008 recession, where PE firms concentrated on organic growth rather than add-on acquisition. What remains to be seen is whether valuations will rebound quickly after the crisis ends and PE activity ramps up to pre-crisis levels.

Existing Private Equity Portfolio Companies

Draw down credit lines to stay afloat in what look to be temporary economic conditions. Work with your accountants, attorneys and lenders regarding covenants, forbearance and other terms. Take advantage of SBA or distressed lending opportunities available under the new stimulus package. Note, however, that the SBA affiliation rules apply, which may result in disqualifying an otherwise-eligible company. The SBA issued further guidance on the application of the attribution rules to private equity and venture capital-owned businesses, which seems to disqualify many portfolio companies from receiving these loans. If not eligible for an SBA loan under the new law, there are other tax relief provisions available to portfolio companies, such as the employee retention credit and a deferral of time to pay employer payroll taxes.

Further, determine how the tax relief provisions affect your portfolio companies. In certain instances, employers cannot qualify for certain tax relief provisions if they obtain emergency SBA loans. Accordingly, PE funds and their portfolio companies should analyze the various options available to determine which is more beneficial. Marcum’s Advisory & SBA Taskforce can assist in evaluating and discussing options and qualifications based on individual facts and circumstances.

New Investment Opportunities

COVID-19 could stimulate an enormous number of new company formations – from logistics to medical supplies, medical testing and vaccines, to whatever will be the “new normal.” Private equity will be a huge driver even before things settle down. Look for PE entry at earlier stages in a company’s life than they have historically invested.

Impact on Fundraising Environment

To be sure, fundraising activity flourished along with the rise in exit multiples, as PE returns often outperformed the equity markets, even as the markets rose to all-time highs. Like lenders, LPs that have already completed their due diligence are likely to follow through on their commitments, while commitments from LPs earlier in the due diligence process may be delayed. Additionally, established funds will find it easier than newer funds that do not have a track record of successful exits on which to fall back. Finally, during the 2008 financial crisis LPs learned of the potential rewards of riding things out rather than underinvesting in the private markets.

Seller Action

Sellers should proactively manage costs now, so EBITDA holds up in the face of falling revenue, delays in collecting receivables, potential write-offs and other cash flow issues. Some measures include, but are not limited to, calling vendors to discuss deferring payment; assessing all vendors and determining which may be non-critical in the future; deferring CapEx spending until after the crisis passes, or perhaps accelerating spending if you can get favorable pricing and/or terms; and assessing employment performance, identifying redundant employees and other human resource matters.

For more information about the impact of the coronavirus on the private equity community, please contact:
Andrew Finkle, Partner, Advisory Services, at 215.297.2370 email Andrew
Jeffrey Zudeck, Regional Managing Partner, at 215.297.2600 email Jeff

Coronavirus Resource Center

Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.