Private Equity’s View of COVID-19

A just-completed survey from Stifel Financial of technology executives, entrepreneurs, and private equity and venture capital investors finds most expect the COVID-19 crisis to have a lengthy impact on business operations, leading to a U-shaped economic recession.

The new survey, conducted from April 6-12, had 270 respondents and reported that a majority of portfolio companies appear to have enough liquidity to weather the storm and potentially eye add-on acquisitions.

Among the most important survey results are:

  • The majority of PE and VC respondents (62%) expect to see a business impact from COVID-19 on their portfolio companies for more than six months, while nearly half of technology executives and entrepreneurs (46%) are also planning for a disruption lasting at least half a year.
  • Most (55% of executives and entrepreneurs, and 65% of PE and VC investors) expect a U-shaped recession.
  • A majority of PE and VC investors (76%) and executives and entrepreneurs (55%) are planning to pursue add-on acquisitions or will push their portfolio companies to do so as the technology sector faces COVID-19 business disruptions.
  • Executives and entrepreneurs are slightly more optimistic about 2020 revenue projections with one-third (34%) expecting to meet their budget goals, but just 19% of PE and VC investors believe their portfolio companies can reach 2020 revenue goals.
  • Customer churn doesn’t seem to be a problem yet, with roughly 77% of executives and entrepreneurs and 76% of PE and VC investors reporting less than 5% churn in recurring revenue.

“Our technology industry clients and their investors appear well-positioned to withstand the immediate negative impacts of COVID-19,” said Cole Bader, co-head of the Stifel global technology group. “While a natural slowdown in activity is expected, we believe that technology will be the key driver of a global economic recovery and the sector will continue to grow strongly post-pandemic.”

Specific findings from private equity and venture capital investors include:

  • Most respondents (65%) expect to delay any portfolio company exits planned for the first half of this year to 2021, and 30% said their planned exits would be delayed by 3-6 months but would take place before the end of 2020. Only 5% plan to continue along pre-existing timelines.
  • Almost every respondent said they expect valuations they will pay for companies in 2020 to decrease at least somewhat with 54% of respondents seeing valuations declining 5%-20%, and 43% of respondents saying they expect valuations to come down more than 20%.
  • Similarly, sale prices for portfolio companies are also expected to decrease, with 73% expecting valuations to come down a modest 5%-20%, while nearly a quarter (24%) of respondents expect valuations to come down more than 20%.
  • Over half (53%) of respondents reported no change in their approach to new “platform” investments, while 40% said they are pursuing value-based deals. Only 7% of respondents have put their investing approach on hold.
  • The overwhelming majority of respondents (95%) said their limited partners are not pressuring for short-term liquidity.

“Interestingly, the majority of our PE/VC respondents are only forecasting a modest reduction in prices for acquisitions and sales of technology assets and expect to continue with add-on acquisitions for portfolio companies,” added Patrick Seely, co-head of the Stifel global technology group. “Deal activity may slow, but it clearly won’t stop.”

St. Louis-headquartered Stifel, founded in 1890, is the principal operating subsidiary of Stifel Financial Corp. (NYSE: SF) and provides brokerage, trading, investment banking, and investment advisory services.

Private Equity Professional | April 21, 2020

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