The world’s focus on dealing with the pandemic will continue to disrupt M&A activity in the short to medium term. Financial sponsors and the direct investing platforms of pension funds will grapple with many of the same issues as strategic players (and their boards) in the coming months.
While it is early days, there are certain challenges (and opportunities) on which sponsors in particular have been and will continue to be focused.
Protect Existing Assets
Sponsors are focused on their existing portfolio companies first and foremost. Meeting payroll, continuity of supply chains, meeting debt covenants and keeping management engaged in a difficult circumstance are front and centre and have in the near term superseded new deal flow as a priority. No asset is more important to sponsors than their people.
Focus on Liquidity
For pension funds in particular, as well as larger sponsors, where new investments are made we expect to see a focus on liquid assets (especially given the substantial sell-off that has not spared even traditionally more expensive targets). It may be that in the medium term we see private investments into public companies (PIPE transactions) emerge as a trend much as we did in the financial crisis of 2008. In the case of strong corporate performers, however, we expect banks will be available to support them in a way they could not in 2008.
Currency
While it is too soon to say where the CAD/USD differential will settle in the medium to long term, the CAD’s decline could create particular opportunities for U.S. sponsors, especially where there had been a valuation gap on a previously diligenced targets.
ESG Investing
In the face of the unprecedented toll COVID-19 is taking on many communities in which sponsors invest, expectations of investors (limited partners) and consumers alike are evolving. Because investors and the general public expect businesses to contribute to a solution,the environmental, social and governance (“ESG”) perspective is one against which sponsors and their portfolio companies will increasingly be judged.
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