News reports are coming in almost daily. Around the world, the rampant pandemic is causing exceptional social conditions, and in many countries, the healthcare system is reaching its limits or struggling to cope with the situation despite being overwhelmed. Economic concerns are taking a back seat to existential problems, yet for many companies, their very survival is at stake.
Does it even make sense to invest right now? Which investments are currently on hold, and what developments can be expected in the post-crisis period?
Businesses have ground to a halt, and applications for short-time work are rising rapidly. Small and medium-sized enterprises, the entire cultural sector, and freelancers are particularly hard hit by the shutdown. But even large companies in the travel and leisure industry, such as Lufthansa and TUI, are struggling with massive revenue losses.
Losers and Winners
However, some industries are also benefiting from the current situation. This is not due to changes in corporate strategies, but rather to the fact that a large portion of society is stuck at home. #stayathome and #flattenthecurve are therefore trending on Twitter right now, and the consequences of restricted mobility have significantly altered user behavior.
The television industry—often declared dead—is experiencing a resurgence; streaming services like Netflix are reporting rising viewership; and delivery services and online shopping, just like the grocery retail sector, are booming.
How are investors evaluating companies in the current situation?
Corporate transactions—that is, the buying and selling of companies—are currently much more difficult because business prospects cannot be reliably assessed. Buyers therefore want to protect themselves even better, especially now. How can companies even be appropriately valued given the rapidly changing current situation?
Valentin Reisgen, Managing Partner at Kai Capital Management, sees no restrictions on processes already underway but also notes a standstill in current acquisitions.
“There are already ongoing transactions that are at an advanced stage and should be completed for various reasons. In my view, however, this is only an option for strategic investors who operate within their industry and are well-positioned to assess the impact of the coronavirus and the post-crisis period.”
72 percent of private equity managers expect a sharp economic downturn
Furthermore, in these cases, the pre-crisis situation could be factored into the valuation, and a risk discount could be discussed—one that could be offset in the medium term through an earn-out arrangement, Reisgen added. No new transactions are currently being recorded in the M&A market, and activity is at a standstill for the time being.
A study available to the Handelsblatt shows that, in light of the crisis, a “front-loading effect” is to be expected. Some transactions are being completed faster than expected—for example, when the digitalization of the respective business model needs to be accelerated. Overall, sale processes are being handled more flexibly: Withdrawal clauses and put options are frequently used instruments during the crisis. The survey also shows that 72 percent of private equity managers expect a sharp economic downturn.*1 Thus, uncertain forecasts continue to shape the subdued sentiment in these assessments.
Investments in Crisis-Resilient Sectors
At present, significant investments are possible almost exclusively in areas such as machinery or commercial real estate, which require long time horizons of 12 months or more. They are also possible in sectors operating in “safe” industries, such as construction, that can deploy substantial amounts of equity capital.
There is also continued interest in the area of business succession. Professional buyers such as family offices and private equity firms, which have substantial capital reserves, remain interested.
Purchase and Sale of Insolvent Companies
Many entrepreneurs also see the crisis as an opportunity to strike out on their own. This strategy makes sense in some industries, but the move should be carefully considered.
“The crisis will lead to an increased number of insolvencies, and certain types of investors have exploited such situations in the past. We believe creditors and administrators also have a responsibility to keep the long-term well-being of the company in mind within the broader societal context,” says Harvey Gross, a partner at Deutsche Unternehmensnachfolge, assessing the current situation.
As in any crisis, there are winners and losers—companies that will emerge stronger and others that will be broken by it. Investments and corporate acquisitions can certainly make sense in stable industries, but they should be carefully weighed—just as they were before the COVID-19 crisis. Caution is especially warranted when it comes to supposed bargains. Always look for reputable and professional offers from both buyers and sellers.
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*1 Peter Köhler, Robert Landgraf: “Ambivalent Financial Investors,” in: Handelsblatt, March 27, 2020, p. 30
