Coronavirus Impact on PE Markets: How to Neutralize Risks?
As the COVID-19 outbreak intensifies globally, top private equity firms are quickly bracing up to lessen the business risks. These measures can help protect your PE firm.
🔗COVID-19 outbreak has affected the PE markets worldwide, and the US is no exception. However, compared to other parts of the world, the effect on the US economy has been minimal. As per an 🔗analysis conducted by the Deutsche Bank, the coronavirus epidemic will falter the GDP growth worldwide in 2020. The forecasted figures report a downfall of global GDP by 0.2 percent this year.
The only way out for the global private equity firms to mitigate the impact of coronavirus is to quickly take corrective measures that can help shield their respective businesses.
Here are a few steps one can take to neutralize, or rather, lessen the repercussions of the scourge:
👉When You Happen to Be on The Sell-Side of the Sales Process in a Portfolio Company
Try negotiating a much specific carve-out from the 🔗MAE (Material Adverse Effect) clause. This will dismiss the possibility of the events originating out of coronavirus add up to an MAE. However, there is no surety on whether a specific carve-out for the COVID-19 will be necessary as the courts demand a long-haul change to compose an MAE. It would be worthwhile to re-assess the regular carve-outs for general economic situations.
👉If You Happen to be on the Buy Side of the Sales Process
Here, you must prefer the opposite position in the MAE clause. In different words, you would want to negotiate for a walk-away from the deal if the company is expected to undergo a short-term effect originating from the virus epidemic. Eventually, it will boil down to the issuance of risk between the seller and the buyer as a result of the virus outbreak. Any pandemic clause must be carefully negotiated.
👉Buy-Side in a Leveraged Finance Scenario
Here, the key factor to consider is that the MAE clause in the purchase agreement must mimic the MAE clause in the acquisition debt agreement. In case, the buyer needs to close an acquisition in the wake of a business downslide arising out of the epidemic, the buyer should ensure that the banks fund the deal in the situation of an MAE-out, and not abandon the transaction.
👉Besides MAE, Addition Deal Clauses in a Purchase Agreement
The additional deal provisions must be analyzed carefully to find out the impact of coronavirus on the deal, which includes the outside date, price adjustment mechanism, and interim operating promises(covenants).
👉Key Contracts Your Portfolio Companies Have Entered Into
Ensure assessing the possibility of a 🔗force majeure provision to be invoked due to the adverse impact of coronavirus on the business. The principle on which force majeure provision is based upon implies — a party is restricted from performing its contractual obligations if it’s not being able to survive in the market because of the unforeseen circumstances that are beyond control.
👉Recovery of Loss in Business
Seek out insurance policies that could bear the loss attained by your business because of the virus outbreak. One must understand the extent of coverage provided in their existing policies and the exclusions. Do they cover the epidemic’s impact? Moreover, be informed about the changing market dynamics, and exclusions that may get introduced to your insurance policy as an outcome of the epidemic.
👉Scope of Breaking into Top Private Equity Firms
A 🔗career in private equity market, or finding a private equity job in the present circumstances could be a tricky task. Job openings in PE have been slammed by large numbers in the event of the outbreak, as the financial markets witnessed a decline across the globe.
Concluding Words
The business risks are soaring high in the current scenario where the death toll is continuously rising as a consequence of the COVID-19 outbreak. The 🔗 best private equity consulting firms in the world are advising not to invest in PE at the moment, neither to fall trap to M&A deals. Minimal transactions are happening in the PE industry as most PE associates are avoiding business discussions and meetings at the moment because of the fear of catching on the virus.
