There has rarely been a time when sound judgement has been more valuable. When the history books are written, 2020 may well join 1929, 1945 and 1968 as pivotal years of change to the global political and economic landscape.
Disruption and volatility have led to a number of pressing questions. Should the established long-term strategy remain unchanged? How can the deal pipeline be maintained amid a global economic shock? Do the fundamentals need to change, or are they more important than ever? And is adopting innovative and fresh thinking a suitable approach in the middle of a generational panic?
It was against this background that a number of senior players in the sector convened for the first virtual annual summit of the British Private Equity & Venture Capital Association (BVCA). With a central focus on ‘New Horizons’, conference participants shared their experiences of a year where many of the best-laid plans seemed destined to be wiped out.
Sleeves rolled up
For Gilles Collombin, a partner at Charterhouse Capital Partners, the onset of the coronavirus pandemic in March required a more proactive and hands on approach to portfolio management. “Certainly some of our investee companies needed more help,” he said. “Our team was involved helping not just with strategic matters, but the operational too – looking at inventory management, shifting production cycles, looking at digitalisation, in addition to the usual help on cash management and so on. It’s been an operational crisis, not a financial one. And the help was welcome.”
Collombin argued that the crisis demonstrated that a firm owned by private equity (PE) not only benefits from access to finance, but to important skills too. Whether that’s strategic advice or hands-on operational help. All of the delegates agreed the enforced dislocation had had a minimal impact on how general partners (GPs) and fund managers interact – and in some cases offered a better way of working.
“My philosophy has always been that PE’s not a desk-based job,” said Shani Zindel, chief investment officer and founding partner at Livingbridge. She said: “You should be out there finding deals and meeting as many companies as possible and working with them. So that won’t change, but we have learnt a series of workstreams that can be done really efficiently remotely.
“That saves time and travel, particularly on the international front. And I suspect there’s a lot of due diligence that can be dropped altogether. But ultimately we’re better in a room together where we can debate, argue and find agreement.”
Sharper tone
Henry Sallitt, managing partner at FPE Capital, agreed that a break from unnecessary travel and a renewed focus on better communication was perhaps an overdue change. “The majority of our communication with limited partners (LPs) certainly has become sharper, more regular but shorter and we’re able to impart the information they need in a really efficient way,” he said. “Although I suspect they miss the chance to find out how we’re doing and meet some of the companies in which we’re investing.”
“The first few months were bumpy, with long days and nights working with our companies. Now, six months on, these are better companies. They’re leaner and hungrier”
Darrel Connell, partner, Imbiba Capital
Clearly those conversations remain vital: GPs, LPs and portfolio companies all thrive on the chance to truly understand what each is doing and to stay abreast of each new development. For some, that will mean discussing how the current crisis and its aftermath will impact on allocation strategies in the coming months and years.
Achieving a balance between nimble responsiveness and maintaining confidence in the stated strategy is especially difficult in times like these. For some, the temptation to shift course is overwhelming.
Joana Rocha Scaff, Neuberger Berman’s MD and head of Europe Private Equity, knows better than most that the winds can change rapidly without warning. Navigating in such a volatile market means that some fundamentals become even more important to steer by. She said: “With funds, we still look for good track records over a cycle, differentiated sourcing, ability to create value and well-aligned teams. And on the direct side, we want strong models that will remain resilient, with a sustainable competitive advantage and reasonable entry terms.”
But she accepted that coronavirus has had an impact. “We have definitely seen a flight to quality, and that’s a trend that has been accelerating,” she explained. “It’s a more challenging environment for emerging managers in terms of building relationships. While we’re still keen to invest in emerging managers, we see more activity in the more established platforms.”
While the direct deal pipeline has bounced back after a slow period, Rocha Scaff added: “There’s no doubt that assets that have been impacted by coronavirus are not trading. Whereas those that are resilient or even benefiting from the crisis have shown real interest and strong prices – and that’s where we’ve been more active, although they are trading at high prices.”
Emerging voices
The future of emerging managers post-coronavirus was a source of continued debate. While levels of interest pre-crisis were strong, particularly in Europe and the US, the pandemic has placed some stress on the sector. But as one of the key players Ken Cooper, of the British Business Bank (BBB), reiterated that in fact they were open for business – and one of the BBB’s latest new funds has reported a healthy 2020.
“We got in touch with the BBB early and it has been a cornerstone investor and has been really helpful in our journey,” said Camilla Dolan, founding partner of EKA Ventures, explaining that by following the BBB’s advice to focus on galvanising its existing networks, the fund was able to navigate the pandemic without seeing its plans derailed.
Having closed its fund in 2018, Imbiba’s experience of 2020 has seen a focus on careful shepherding of portfolio companies. And as Darrel Connell, partner at Imbiba, reflected, that has meant taking a proactive approach. “The first few months were bumpy, with long days and nights working with our companies,” he said. “And now, six months on, these are better companies. They’re leaner and hungrier.”
Having only deployed 20% of its fund, Connell said the emergence from the lockdown has been an exciting time: “Not only to help our portfolio companies grow, but also looking at new investment opportunities that tend to fall into two buckets: businesses that prior to coronavirus had gone beyond VC and were self-financing that now have come back within our reach; and then those fundamentally sound companies that have had a mixed pandemic who might need help now. And of course, like any sector-driven fund, you really need to know what you’re doing.”
That optimism was echoed by Cooper, whose assessment of the next 12 months was a positive one. He said: “We’ll continue to invest in them through the Enterprise Capital Fund, and we back emerging managers not only because it’s good for the general ecosystem, but it’s driven good returns for us as well.”