Client Update – Adjusting and Adapting Investment Priorities Against The Backdrop of Covid – 19
Apart from the profound human toll COVID-19 has taken, many elements of the economy have, as a result of the pandemic and lockdown, been temporarily “closed for business”. Global supply chains have been disrupted, mergers and acquisitions activity chilled, financing commitments evaporated and investment valuations dropped. While many investors have been anticipating – and amassing capital for – a coming recession, nobody could have predicted its cause or sudden arrival. Adjusting investments in response to current uncertainty demands an approach tailored to the unique circumstances that brought about the economic downturn.
In anticipation of a coming recession, Fortune estimated that private equity funds were sitting on up to $1.5 Trillion in un-funded investment capital. Efforts to deploy these funds should be approached strategically, by weighing the costs and benefits of bolstering existing positions and riding out the storm, expanding your portfolio to emphasize “new normal” value propositions, or following the wave of government economic stimulus. DarrowEverett is closely watching these emerging opportunities on behalf of its banking, real estate, government and investor clients alike.
Existing Investments or New Ventures?
As short-term balance sheets are hit and debt-financing and credit lines rendered uncertain, investors with existing positions may receive capital calls from their managers and will need to decide whether to protect these positions or allow dilution or pay-to-play provisions to take their inevitable toll. Investors may determine that some of these earliest calls relate to investments already operating on razor-thin margins – and that this may not be the last such call as to this investment. Those not tied to such transactions (politically, financially, personally) may elect to “cut their losses” and not to “reinforce failure” as to these erstwhile opportunities – and suffer the consequences.
These short-term cash deficits will create opportunities for yet other investors to expand their positions (perhaps, based on the governing documents at issue, at the expense of their less-committed partners unwilling to contribute capital) or create room for renegotiation of existing economics, leveraging lender relationships, providing credit enhancements and/or staging rescue syndication opportunities. To feel comfortable with their position, investors will need to have an appetite for possible long-term support or see a light at the end of the tunnel in the form of government stimulus, realistic financing options, diminished yet workable skeleton operations or resurgent business prospects.
The “New Normal” Opportunities
Even as COVID-19 has re-cast ideas of a 100-year economic surge event – and, worse, experts have signaled that it could return or presage other, future pandemics – COVID-19 has revealed new opportunities within our economy and the world in the form of “new normal” value propositions. These post- COVID-19 growth sectors range from mask-making and sanitization, testing and healthcare stockpiling, to accelerating existing trends towards ecommerce and a reliance on “gig economy” labor. New opportunities are created as a result of the increase in warehouse and distribution demand, laboratory collaboration and lockdown contingency planning, creating additional service and lab sublease opportunities. Adapting to this “new normal” has accelerated growth in a diverse range of economic activity that was still nascent (or nonexistent) prior to the COVID-19 lockdown: next generation food preparation and delivery processes for operating restaurants; ghost kitchens and groceries; quarantine “getaway” packages for operating hotels; and employee/consumer safety protocols, equipment, training and certification for service-providers interfacing in a pandemic, just to name a few. There is a new world of innovation at hand and an old world to both adapt – and ultimately return to with more discerning eyes.
Following the Money
Even as some traditional financing arrangements may have temporarily run dry for businesses hard-hit by the COVID-19 lockdown, other avenues of financing, economic relief and government stimulus have sought to cushion the blow. Banks, funds, bond traders, mortgage real estate investment trusts, agencies like Fannie Mae and Freddie Mac and other market participants have all begun adjusting their capital investment and lending approaches in the face of an abrupt economic downturn to support or take advantage of these programs. Myriad opportunities are available to investors seeking to put capital to work – with a strategy that emphasizes caution and alignment with conservative market leaders chasing governmental stimulus or participating in government programs, either as a core investment plan or as a hedge against risk.
Assemble Your Team
Even with the profound difficulties we’re facing as a nation and as a quarantined populace, the same business fundamentals continue to apply putting sidelined capital to work. DarrowEverett LLP is here to assist you in evaluating and embracing opportunities to adjust and adapt as they arise – helping you navigate challenging new realities brought about by COVID-19 and its accompanying recessionary forces. As always, this transactional process involves teamwork, diligence, negotiation and good closing practice, albeit with some coronavirus-related adjustments.
In this regard, pre-COVID-19 rules apply: your trusted team of professionals, accountants, financial planners, insurance advisors, bankers and legal advisors can assist your keeping current on how the pandemic is impacting your business and portfolio as well as the latest thinking on mid-range impacts, forecasted stimulus timelines and that light at the end of the tunnel. DarrowEverett is working internally – and also with its referral partners and various professional groups to remain at the vanguard of COVID-19 response. With decades of practice experience, strong internal teamwork and policies, broad networks and honored relationships, as well as strong processes in place to ensure our business with you is, to the extent possible, business as usual – even if everything else isn’t – DarrowEverett is ready to help you achieve your business goals now more than ever.
Please note, our primary goal in providing these updates is to keep our clients informed. We are working diligently to remain well informed and up to date on information and advisements as they become available. However, information is changing rapidly, and depending on the specific language in your contracts and the situation you are facing, the advice contained in this alert may not be appropriate for your individual circumstances. As such, please reach out to us if you need help addressing any of issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Stay safe and healthy.