Making predictions at any point of the economic cycle is difficult. Doing so as the biggest public health emergency in living memory works its way through the world’s economies makes it almost impossible.
What’s clear, is that businesses in almost every sector of the economy have been impacted, the majority adversely. Leaders have all faced the same challenge of responding and adjusting to a rapidly changing environment.
But when we look back at previous economic shocks, lessons learned can be applied, however cautiously, when considering the road ahead.
Entrepreneurs and business leaders are driven by a fundamental need to grow, even if that means taking new and unplanned routes in order to continue their journey. And what history shows is that adversity always creates opportunity.
As a firm that’s invested for nearly 40 years, this has been our own experience. It requires a mindset shift, whereby all parties dig deeper to find and create value, but this will always lead to new openings.
One trend we’re already seeing is an acceleration of buy and build activity. We’re supporting a significant proportion of our portfolio firms to provide follow-on capital to fund acquisitions, whether to build scale or diversify in response to new market conditions.
This is likely to be a hallmark of the 2020 M&A market.
Similarly, larger corporates are being required to restructure and refocus their operations. In previous cycles, we’ve seen this create far more opportunity for so-called carve outs, which can provide fresh equity and focus for management teams and fresh capital and bandwidth for the vendor.
Meanwhile, life on the public markets for many firms has been choppy to say the least, with recent data showing the number of companies delisting increasing in the past 12 months. As those firms look for new sources of capital, it seems likely this trend will continue.
And as always, whilst the number of primary buyouts coming to market is understandably lower, there are management teams out there with robust and realistic growth strategies looking for partners who are able to support their longer-term ambitions. Recent events may mean they’re not ‘oven-ready’ deals, which is why a relationship-based approach – where funders work with management teams to prepare a business for investment – has to be the right one.
Events of the past few months have also created a reflection point for the private equity industry at large. For our part, ensuring that it forms part of the solution to the problem is the starting point – a force for economic good that can help businesses stabilise, grow and become more resilient.
My sense is many of the business leaders that strike out and lean into the challenges of today will lead the world-class businesses of tomorrow, provided we stand alongside them with the capital, support and optimism they need.
By John Garner, Head of New Business, LDC