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When the tide recedes, you’re going to see who has their clothes on

- By Jeslyn Lau, Ningzhe Kow

"For many private investors, the idea that there would be some pullback in the economy and being prepared for different economic scenarios, was something that was planned and in the works."

We have experienced approximately 138 months of growth since the global financial crisis in 2008 prior to COVID-19. Many sophisticated investors were starting to see signs of overheating in the market and have started to re-adjust investment strategies in anticipation of a correction. Agnes Chen from CSC Global Financial Markets speaks with James (Jimmy) Ahn from Clayton Dubilier & Rice on how private equity is taking centerstage in today’s challenging markets.


Flight to quality

“When the tide recedes, you’re going to see who has their clothes on.”
  • Economic downturns allow us to differentiate the good managers and the also-rans.

  • Re-ups are becoming more common amongst LPs and GPs. LPs prefer doubling down on familiar GPs due to their existing relationships.

  • LPs are more comfortable with larger GPs who have stronger track records and are more likely to put money with them. This ‘feast or famine’ situation is not optimal for smaller managers.

  • GPs prefer investing in more resilient businesses that have a history of performing well during adverse times. These are usually firms that have invested significantly into operational capabilities and possess well-structured balance sheets.


Zoom” is not a long-term solution

“So far, due diligence has not been greatly impacted in a negative way. But if it persists and gets harder to go out… I think there will be some impact on the ability to do transactions.”
  • Existing relationships and face-to-face meetings are still pre-requisites for any deal to happen.

  • GPs who are well entrenched within their industry sectors and who have consistent dialogue with businesses, are unlikely to see due diligence efforts impacted in the short-term. ‘Zoom’ due diligence on completely new businesses “will be a little difficult”.

  • This is also true for fundraising. Some of the emerging GPs coming into the market have delayed their roadshow as far back as 2021.


What is on the radar of private equity firms?

“A lot of these opportunities will come to different private equity players, because of their reputation of the GPs, because of the value-add they can bring.”
  • ‘Rescue financing’ in PIPE (Private Investment in Public Equity) deals are becoming more common. Good companies that have run into liquidity issues want ‘smart money’ i.e. reputable investors with strong track records of creating valuing to their portfolio. These companies may be more willing to offer small discounts and incentives to bring these investors on board.

  • Corporate divestitures are other avenues to look into. Large conglomerates are in the process of re-organizing their subsidiaries, and this is an area where investors can ‘hunt’ for good deals.

  • These trends above have catalyzed creative deal-making in the private equity space. Investors who demonstrate the ability to solve the issues faced by these businesses are able to create win-win outcomes.

“In times of discontinuity, and when there is a lot of uncertainty out there, I think it’s an opportunity for private equity to shine.”

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