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It’s Triage Time for Portfolio Companies, McKinsey Urges

Private equity managers should gather their cash and decide now which companies get life support, according to the consulting firm’s new playbook.

Private equity firms may need to step in to help portfolio companies that “urgently need support” during the coronavirus pandemic, according to McKinsey & Company.

The consulting firm pointed to at-risk portfolio companies, such as those in the travel and hospitality industries, which are experiencing “immediate and unthinkable drops in consumer demand.” Also under pressure are portfolio companies in healthcare and retail that provide “critical” products or services, McKinsey said in a new playbook for private equity firms responding to the coronavirus pandemic.

“Ensuring that their supply chains are operating at peak performance is essential,” the report stated.

McKinsey said that private equity firms can help by, for example, providing their portfolio companies with liquidity or sending in operating executives for leadership and execution support. However, finite resources will require general partners to determine which portfolio companies need the most help. McKinsey said that private equity managers should ask questions such as whether portfolio company revenue is affected by social distancing measures and whether employees can work remotely.

At the portfolio company level, McKinsey said that executives need to stabilize operations, manage financial and liquidity risks, and prepare for future recovery and growth. For example, the consulting firm said companies with “especially tight liquidity or hugely reduced customer demand” could set up a “cash war room” to focus on tasks like cutting costs and refinancing debt.

Once portfolio companies have taken actions to recover and stabilize their businesses, McKinsey recommended that firms start preparing for future growth, whether by investing in their businesses or plotting mergers and acquisitions.

[II Deep Dive: Private Markets ‘Not Immune’ to Downturn]

The recommendations were part of a pandemic “playbook” from McKinsey that outlines actions that private equity firms and their portfolio companies should take in response to the ongoing crisis. The guidance included recommendations for how to determine which portfolio companies are most at risk as a result of the coronavirus pandemic, and steps that those companies can take to weather the downturn.

“For many experienced investors, a crisis is not uncharted territory,” the firm said. “But the Covid-19 outbreak is fundamentally unique in its disruption of core working processes.”

For example, legions of employees must now work from home as local and national governments enact measures to prevent the spread of coronavirus. McKinsey said investors can keep businesses running smoothly by training staff for remote work and keeping communications flowing via videoconference with portfolio companies and other investors.

“The scale of human catastrophe from COVID-19 is yet to be seen,” the report concluded. “The economic damage is likewise uncertain. Given the range of potential outcomes, sponsors are right to move quickly and decisively.”

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