Private Equity in the Era of COVID-19: Findings from HGP’s PE Survey

May 29, 2020

In May, as the U.S. cautiously started to reopen amid intense controversy, HGP polled hundreds of private equity funds across all stages of investment to find out how COVID-19 has impacted deal flow.  Eighty respondents provided their perspective on topics ranging from appetite for new investments to access to debt to the impact on portfolio companies.

Respondent Demographics

Effect of COVID-19 on Valuations

When asked how they expect overall and Health IT valuations to behave in both the short-term and the long-term, investors were largely neutral on average, with only a very slightly bearish perspective in the short-term.  Over the long-term, investors indicated a much more neutral impact of COVID-19 on valuations, with a slightly more bullish perspective on Health IT as a sector compared to the overall market.

Health IT Interests by Subsector and Customer Segment

Our survey included a series of questions designed to identify how COVID-19 may have altered investor appetite across the subsectors and end-markets of Health IT.  As hypothesized, we saw a rise in interest in telemedicine and remote care delivery, as well as direct-to-patient healthcare solutions.  At the other end of the spectrum, solutions such as EMR/clinical documentation and revenue cycle management saw a drop in interest and 12.5% fewer of our respondents were interested in investing in companies serving the hospital and health system end-market after COVID-19 compared to before.  These results lead us to conclude that investors are tracking the decline in hospital revenue due to COVID-19 and accordingly expect that sales of new technologies to hospitals will be challenged.

Change in PE Activity and Focus

Overall, investors are seeing reduced deal flow, but continuing to seek out opportunities to invest despite the challenged environment.  While some indicated they are looking at more distressed and discounted opportunities, that does not seem to be an overarching focus for our respondents.  Given the rapidly evolving situation, approximately 25% of respondents were either still evaluating how to respond to the COVID-19 shutdown or had decided to pause on new deals for the time-being until the market stabilizes.

Access to Debt

One of the clearest impacts of COVID-19 is a tightening of the debt markets as investors flee to safer assets.  Despite Fed actions to lower interest rates and encourage lending, our respondents from the PE community are seeing challenges in accessing debt.  Based on the survey responses, accessing debt for existing platforms for either working capital or add-on acquisitions appears to be less challenging compared to that for new platforms.

Portfolio Company Strategies

We asked our respondents to estimate the percentage of their portfolio companies employing each of the following strategies.  From these responses, we estimated the average percentage of portfolio companies employing each strategy.  Fewer than 10% of portfolio companies were estimated to have had no change to operations due to COVID-19, exhibiting the widespread impact COVID has had on businesses.  Many companies are applying for federal relief, seeking additional capital to cover costs, reducing payroll, or delaying payables in order to manage until the economy recovers.

Expectations for the Recovery

Overwhelmingly, our respondents expect the economic recovery to be either W-shaped or U-shaped, essentially meaning that an economic recovery will be delayed, but that it will be relatively quick once it occurs.  Now over 2 months into the downturn, there appears to be consensus that a V-shaped recovery is unlikely as consumers will continue to social distance until there is an effective vaccine or treatment for COVID-19.  A few respondents expect a drawn-out L-shaped recovery, reflecting a general sentiment that the recovery probably won’t begin in earnest until late 2020 and beyond.

Will Private Equity Close Deals?

To conclude our survey, we asked the question on everyone’s mind – will private equity investors close deals over the next few months before the Fall / Winter?  Overwhelmingly, our respondents indicated that they intend to continue to operate, with no respondents choosing “not likely.”  Nearly 50% of respondents expect to continue with new deals as usual, with the remaining 50% indicating that they intend to continue with new deals, but that there may be restrictions on valuation or need to be highly strategic.

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