The results revealed the significant turmoil in capital markets has had little effect on the capital structures of portfolio companies, with 87% of respondents saying their holdings were unlikely to breach covenants as a result. Only 13% said holdings were either close to breaching or likely to breach covenants in the next two to three months.
“Private equity-owned companies have a number of structural advantages that may have allowed them to navigate this crisis,” said Jon Pliner, U.S. head of Delegated Portfolio Management. “In addition to the expertise provided by private equity managers, the additional access to equity and debt capital from their sponsors may also have provided some respite.”
Regarding customer demand for products or services, however, responses were far more varied with 46% of respondents reporting their holdings were feeling a medium-to-high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy and materials sectors. In contrast, sentiment among commercial services firms remained robust, while 20% of consumer staples firms even reported a positive impact on demand.
The impact on businesses’ supply chains and their own internal operations also remained small, with around 80% of respondents showing low levels of concern on either point, indicating most private equity-held businesses effectively implemented alternative working arrangements to work around any disruptions arising from the COVID-19 crisis.
“While the first half of the year has seen a subdued environment for exit deals, managers have been able to maintain significant flexibility over both the timing and the terms of company exits. As a result, we have seen little evidence of forced exits by private equity firms into a depressed market,” said Pliner. “Beyond the short-term dislocation, we also see several opportunities where we can continue to deploy capital, notably in technology, healthcare and consumer staples. With deal volumes depressed, there appears to be far less competition for opportunities and, as a result, potentially better entry pricing.”