3 questions to smart minds

Pandemic-relevant effects on the M&A sector

For this 3 questions to Wolfram Schmerl

Alan­tra in Frankfurt
Photo: Wolf­ram Schmerl
4. May 2020

Because of Corona, sales in entire indus­tries have drop­ped to zero. Half of German compa­nies are on short-time working, 20 percent of them want to cut jobs, supply chains have been sever­ely affec­ted, demand has slum­ped — the impact of the Corona pande­mic on German SMEs is massive. What does this mean for private equity inves­tors who have inves­ted in more than 100 such compa­nies before the end of 2019? How are they now using the more than two tril­lion (euros) in “dry powder” from their inves­tors, inclu­ding insu­rance compa­nies and pension funds?

For this 3 ques­ti­ons to Wolf­ram Schmerl, Mana­ging Part­ner of Alan­tra in Frankfurt

1. What impact will the Corona pande­mic have on the German M&A market? Do the posi­tive or nega­tive influen­cing factors predo­mi­nate? Are private equity inves­tors now going into hiber­na­tion or are they sens­ing buying opportunities?

The answer to this ques­tion can only be a snapshot at this time, but . There are many signs that M&A volu­mes will fall signi­fi­cantly: Many inves­tors are now concen­t­ra­ting on stee­ring their port­fo­lio compa­nies through the crisis as well as possi­ble. If you don’t have to, don’t sell now. Ther­e­fore, holding peri­ods will tend to lengthen.

Large-scale finan­cing has also become consider­a­bly more diffi­cult. Banks and debt funds have made a risk adjus­t­ment. They charge signi­fi­cantly higher prices and put the brakes on leverage. Over the next 12–18 months, the ques­tion of how a company has held up during the crisis will be a key point in any due dili­gence. Those that perform weakly will have to accept valua­tion discounts — making consen­sus with poten­tial buyers more diffi­cult. The situa­tion is diffe­rent for compa­nies that are weathe­ring the crisis well. Really good compa­nies are a scarce commo­dity in any market phase, and buyers can always be found for them who will also pay a corre­spon­ding price. Oppor­tu­ni­ties for PE inves­tors could also arise from the fact that, in our view, some fami­lies are likely to decide in the coming months to sell their family busi­ness after this crisis in order to trans­fer the assets tied up in it to the private sector.

2. Is it alre­ady possi­ble to predict which indus­tries will be winners and which losers in the crisis?

Indus­tries such as tourism and hotels, gastro­nomy, event and cate­ring are massi­vely affec­ted. The German auto­mo­tive indus­try and thus its suppli­ers are likely to suffer for longer. In many Euro­pean markets, people have other needs than buying new cars for the fore­seeable future, but vehicle sales in China are alre­ady picking up signi­fi­cantly. Many machine buil­ders are no longer recei­ving orders. In addi­tion, the gene­ral compe­ti­tive envi­ron­ment was chal­len­ging for the German export indus­try even before the pande­mic — the key words being trade wars, slowed growth in China, Brexit, and the switch to elec­tro­mo­bi­lity. So we expect finan­cing advice and distres­sed asset tran­sac­tions to become more important for us as advisors.

On the winning side, of course, compa­nies in the health­care indus­try are now beco­ming even more attrac­tive than they alre­ady were. Soft­ware and IT compa­nies as well as compa­nies in the food produc­tion and indus­trial auto­ma­tion sectors also remain in demand. But you have to look very closely at the subsec­tors. Take the food and beverage indus­try as an exam­ple: At the moment, you read a lot about how people are now drin­king more beer and wine at home. Howe­ver, this will not compen­sate for consump­tion at festi­vals, in soccer stadi­ums and in the cate­ring trade. Frozen food, on the other hand, could see demand rise. Howe­ver, we also expect prices for basic mate­ri­als in produc­tion and thus food prices over­all to rise. This shows how diffi­cult it curr­ently is to make blan­ket statements.

3. What impact has the Corona crisis had on private equity as an asset class?

The low inte­rest rate envi­ron­ment is now likely to be cemen­ted for a long time, so pension funds and insu­rance compa­nies will conti­nue to allo­cate more and more assets to alter­na­tive invest­ments. This means that the funda­men­tal trend toward these forms of invest­ment remains intact. — But there could be some shifts: A private debt fund is alre­ady strugg­ling to gene­rate a posi­tive return with just one losing invest­ment. There, the risk is now incre­asing. Infra­struc­ture, on the other hand, could become more inte­res­t­ing. Private equity ther­e­fore remains attrac­tive in any case. The importance of large invest­ment compa­nies such as Ardian, Blackstone and KKR, for exam­ple, conti­nues to grow as they conti­nu­ally expand their plat­form and incre­asingly become asset mana­gers mana­ging inves­tor funds across multi­ple asset clas­ses. They have a good track record so far, which attracts further capi­tal. Now they can — and must — really prove them­sel­ves and show how they are navi­ga­ting their port­fo­lios and inves­tors’ money through the crisis.

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