Dealmaking in a Pandemic

Private equity firms have loads of cash to put to work, but uncertainty, travel restrictions, and working at home are crimping transactions.

Illustration by II

Illustration by II

Private equity’s biggest worry just months ago was how to remain disciplined as valuations continued to hit record highs.

Now private equity shops and alternative credit managers are concerned about putting deals together when travel is banned, restaurants are half empty, and thousands of employees in the industry are working from home.

“I can’t take credit for the term, but it’s the Great Stay-In. Literally, everybody is staying in,” said Randy Schwimmer, who oversees senior lending origination and capital markets for Churchill Asset Management, an affiliate of Nuveen.

“On the deal front, the pipeline has been put on hold. We are in the middle of closing deals, but they were already in process,” Schwimmer said.

Schwimmer said much of the lull in activity has to do with uncertainty as much as anything else. “What we’re hearing now, and this is day-by-day, is that sponsors are reluctant to engage because the impact of the virus is still unclear,” he said.


With sponsors putting deals on hold, that puts lenders in wait-and-see mode as well, he added.

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With activity chilled, most managers are taking a hard look at the companies they already own.

“It’s hard to price risk right now, whether you’re a lender, in private equity, or a shareholder. People are pivoting to trying to understand what is going on in their own portfolios. We, like our peers, are playing defense, not offense,” said Art Penn, founder and managing partner of PennantPark, a middle-market credit manager with more than $3 billion in assets.

“A week ago it was a Chinese supply discussion. Now it’s about our own economy and how companies are going to perform in this environment. Initial focus is on companies in the travel, events, airlines, or entertainment industries. After that, the second order affects will be analyzed in a broader range of industries,” added Penn.

Private equity firm Lovell Minnick Partners has an active pipeline of deals, but relies heavily on meetings.

“While many conferences and in-person meetings are being cancelled, we continue to have productive discussions with new companies via phone or videoconference; in the long run, that’s the biggest leading indicator of future investment activity for us,” said Brad Armstrong, partner at Lovell Minnick.

“However, in the short run, it seems likely we will see deal activity taper. A lot can be accomplished remotely, but it’s unclear how deal processes will advance through typical execution steps amid growing limitations on travel and personal interaction,” he added.

PennantPark’s Penn is more blunt.

“Video conferences have been around a long time, but they never truly replaced meetings, because there is a lot of power in a face-to-face discussion. If this situation lasts six or nine months, maybe then the dynamic will change. Would we do virtual due diligence? It’s unlikely. We like meetings.”

Penn also has plenty of patience.

“People may put money to work opportunistically if they think they are getting a compelling deal. There will be some of that. But the reality is that we’ve learned that there is no need to rush in. Let’s see where things settle and there will still be plenty of opportunities,” said Penn.