April 2020

SGA Whitepaper

MERGERS ampACQUISITIONS

IMPACT OF COVID-19 ON

April 2020

SGA Whitepaper

wwwsganalyticscom

2

SGA Whitepaper | April 2020

Introduction

Perspective of strategic amp financial buyers

Impact on middle market MampA

Conclusion

1

2

4

3

3

4

11

7

CONTENTS

wwwsganalyticscom

3

SGA Whitepaper | April 2020wwwsganalyticscom SGA Whitepaper | April 2020

The COVID-19 pandemic continues to create havoc worldwide More than 175 countries and territories have reported cases of COVID-19 and the situation continues to evolve by the day With the global response to COVID-19 continuing to change rapidly businesses engaged in corporate acquisitions and disposals are facing a period of significant uncertainty

This report aims to highlight some of the key issues surrounding MampA market amidst the ongoing crisis and how the market is expected to pan out in the coming months

Wait till the dust settleshellip

3

INTRODUCTION

wwwsganalyticscom

4

SGA Whitepaper | April 2020

IMPACT ON MIDDLE MARKET MampAOver the past decade low-interest rates strategic buyers seeking acquisitions for growth and record private equity fundraising created a supply-demand imbalance that meant too much money chasing too few high-quality companies However the rapid spread of COVID-19 pandemic is expected to change the dynamics of MampA market in the coming months with participants trying to assess the true impact of COVID-19 on the business supply chain availability of financing growth prospects and other critical factors While a slowdown is inevitable its degree will vary depending on the business model strength of the balance sheet and management quality of the market participants

Currently there is a mixed level of activity which appears to largely reflect the uncertainty in the public equity markets Some new transactions both buy-side and sell-side are still coming in but at the same time certain existing transactions are being put on hold The transactions currently at risk appear to be the larger transactions while some transactions in the middle market are still moving forward Sell-side processes scheduled to launch are being put on hold but bankers are still being asked to get the businesses ready to go to market when things hopefully calm down However this is expected to change as COVID-19 spreads and its impact across markets is determined

For deals in early stages therersquos a lot of anxiety on the part of sellers and while the buyers remain cautious - there are some who are hitting the pause button to wait and see how the situation shapes up in a few months For sellers it is important that they focus on business and try to keep up operations to the extent possible

In challenging times availability of capital is a key consideration that influences MampA transactions Debt capital in the middle market remains available from both banks and non-traditional credit providers such as Business Development Companies (ldquoBDCsrdquo) and credit funds for many sectors For those industries most directly impacted by COVID-19 dynamics are changing daily and warrant frequent updating In addition to increased spreads in the near term it is likely that there might be more conservative lending behaviour displayed by credit providers BDCs and other credit funds are expected to move in to fill the void for middle market MampA appetite if traditional banks become more conservative in the near term

Source PitchBook

347

1144

55

(16)

94124

(125)

(273)

1207 11881300

1461

1278

929

Q1 2014 Q1 2015 Q1 2016 Q1 2017

Deal Count

Q1 2018 Q1 2019 Q1 2020

US Private Equity Deals ()

wwwsganalyticscom

5

SGA Whitepaper | April 2020

With a large number of companies anticipated to face margin pressures numbers are also bound to drop over the next two to three quarters This is expected to affect the valuation of companies and raise important questions for buyers - Does historical financial information represent a true reflection of the target that may now have a disrupted supply chain and inventory levels along with distorted accounts receivables Does the growth forecast and the underlying assumptions still make sense

Pricing in middle market MampA is dictated by various factors While the two important factors - availability of capital and the supply amp demand of quality businesses are intact concerns surround the growth prospects of target companies A definite impact is being witnessed by businesses which is set to hamper their growth for FY20-21 Transactions that happen this year are expected to include the clause of contingent considerations (ie earnouts) to be paid to sellers based on 2020 or multiperiod financial performance

An epidemic like COVID-19 brings a certain degree of uncertainty into the deal-making process Both buyers and sellers are looking at deal protection mechanisms for transactions which are currently being negotiated Market volatility and its potential impact on businesses will most certainly result in some sellers reconsidering whether this is the right time to market their business for sale Sellers will be concerned about achieving full value as well as being concerned about considerable uncertainty through the sale process as a result of potential issues with buyer funding and the detrimental impact on the business of lengthy deal processes

A Material Adverse Change (ldquoMACrdquo) with reference to MampA is a clause that aims to give the buyer the right to withdraw from the transaction upon the occurrence of certain events which are detrimental to the target company MAC clauses tend to receive a great deal of attention in the aftermath of significant events affecting the economy at large or a particular industry For example the events following 911and the financial crisis of 2008-09 saw a discernible increase in buyers invoking MAC clauses in agreements that were signed before that period

General categorisation on whether the COVID-19 pandemic is a MAC is not possible as in each case the analysis will depend on the specific wording of the provision at issue and the effects on the particular company The form and content of a MAC clause will vary from transaction to transaction and market practice in the relevant jurisdiction For ongoing negotiations for prospective transactions the contracting parties should give careful consideration to crafting the MAC provisions in light of the COVID-19 outbreak

The COVID-19 pandemic has reduced accessibility and physical meetings It has caused delays in due diligence activities including on-site inspections Advisers are resorting to the use of technology and using drones to help complete transactions Private equity firms have asked for drone footage to prove the existence of assets buildings and factory sizes and numbers The entire MampA diligence process is now expected to take longer than before with an increased focus on supply chain and customers The buyers will conduct a detailed examination on how the target has managed the supply chain disruption amidst COVID-19 For customers buyers will be looking at how COVID-19 impacts purchasing behaviour

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

2

SGA Whitepaper | April 2020

Introduction

Perspective of strategic amp financial buyers

Impact on middle market MampA

Conclusion

1

2

4

3

3

4

11

7

CONTENTS

wwwsganalyticscom

3

SGA Whitepaper | April 2020wwwsganalyticscom SGA Whitepaper | April 2020

The COVID-19 pandemic continues to create havoc worldwide More than 175 countries and territories have reported cases of COVID-19 and the situation continues to evolve by the day With the global response to COVID-19 continuing to change rapidly businesses engaged in corporate acquisitions and disposals are facing a period of significant uncertainty

This report aims to highlight some of the key issues surrounding MampA market amidst the ongoing crisis and how the market is expected to pan out in the coming months

Wait till the dust settleshellip

3

INTRODUCTION

wwwsganalyticscom

4

SGA Whitepaper | April 2020

IMPACT ON MIDDLE MARKET MampAOver the past decade low-interest rates strategic buyers seeking acquisitions for growth and record private equity fundraising created a supply-demand imbalance that meant too much money chasing too few high-quality companies However the rapid spread of COVID-19 pandemic is expected to change the dynamics of MampA market in the coming months with participants trying to assess the true impact of COVID-19 on the business supply chain availability of financing growth prospects and other critical factors While a slowdown is inevitable its degree will vary depending on the business model strength of the balance sheet and management quality of the market participants

Currently there is a mixed level of activity which appears to largely reflect the uncertainty in the public equity markets Some new transactions both buy-side and sell-side are still coming in but at the same time certain existing transactions are being put on hold The transactions currently at risk appear to be the larger transactions while some transactions in the middle market are still moving forward Sell-side processes scheduled to launch are being put on hold but bankers are still being asked to get the businesses ready to go to market when things hopefully calm down However this is expected to change as COVID-19 spreads and its impact across markets is determined

For deals in early stages therersquos a lot of anxiety on the part of sellers and while the buyers remain cautious - there are some who are hitting the pause button to wait and see how the situation shapes up in a few months For sellers it is important that they focus on business and try to keep up operations to the extent possible

In challenging times availability of capital is a key consideration that influences MampA transactions Debt capital in the middle market remains available from both banks and non-traditional credit providers such as Business Development Companies (ldquoBDCsrdquo) and credit funds for many sectors For those industries most directly impacted by COVID-19 dynamics are changing daily and warrant frequent updating In addition to increased spreads in the near term it is likely that there might be more conservative lending behaviour displayed by credit providers BDCs and other credit funds are expected to move in to fill the void for middle market MampA appetite if traditional banks become more conservative in the near term

Source PitchBook

347

1144

55

(16)

94124

(125)

(273)

1207 11881300

1461

1278

929

Q1 2014 Q1 2015 Q1 2016 Q1 2017

Deal Count

Q1 2018 Q1 2019 Q1 2020

US Private Equity Deals ()

wwwsganalyticscom

5

SGA Whitepaper | April 2020

With a large number of companies anticipated to face margin pressures numbers are also bound to drop over the next two to three quarters This is expected to affect the valuation of companies and raise important questions for buyers - Does historical financial information represent a true reflection of the target that may now have a disrupted supply chain and inventory levels along with distorted accounts receivables Does the growth forecast and the underlying assumptions still make sense

Pricing in middle market MampA is dictated by various factors While the two important factors - availability of capital and the supply amp demand of quality businesses are intact concerns surround the growth prospects of target companies A definite impact is being witnessed by businesses which is set to hamper their growth for FY20-21 Transactions that happen this year are expected to include the clause of contingent considerations (ie earnouts) to be paid to sellers based on 2020 or multiperiod financial performance

An epidemic like COVID-19 brings a certain degree of uncertainty into the deal-making process Both buyers and sellers are looking at deal protection mechanisms for transactions which are currently being negotiated Market volatility and its potential impact on businesses will most certainly result in some sellers reconsidering whether this is the right time to market their business for sale Sellers will be concerned about achieving full value as well as being concerned about considerable uncertainty through the sale process as a result of potential issues with buyer funding and the detrimental impact on the business of lengthy deal processes

A Material Adverse Change (ldquoMACrdquo) with reference to MampA is a clause that aims to give the buyer the right to withdraw from the transaction upon the occurrence of certain events which are detrimental to the target company MAC clauses tend to receive a great deal of attention in the aftermath of significant events affecting the economy at large or a particular industry For example the events following 911and the financial crisis of 2008-09 saw a discernible increase in buyers invoking MAC clauses in agreements that were signed before that period

General categorisation on whether the COVID-19 pandemic is a MAC is not possible as in each case the analysis will depend on the specific wording of the provision at issue and the effects on the particular company The form and content of a MAC clause will vary from transaction to transaction and market practice in the relevant jurisdiction For ongoing negotiations for prospective transactions the contracting parties should give careful consideration to crafting the MAC provisions in light of the COVID-19 outbreak

The COVID-19 pandemic has reduced accessibility and physical meetings It has caused delays in due diligence activities including on-site inspections Advisers are resorting to the use of technology and using drones to help complete transactions Private equity firms have asked for drone footage to prove the existence of assets buildings and factory sizes and numbers The entire MampA diligence process is now expected to take longer than before with an increased focus on supply chain and customers The buyers will conduct a detailed examination on how the target has managed the supply chain disruption amidst COVID-19 For customers buyers will be looking at how COVID-19 impacts purchasing behaviour

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

3

SGA Whitepaper | April 2020wwwsganalyticscom SGA Whitepaper | April 2020

The COVID-19 pandemic continues to create havoc worldwide More than 175 countries and territories have reported cases of COVID-19 and the situation continues to evolve by the day With the global response to COVID-19 continuing to change rapidly businesses engaged in corporate acquisitions and disposals are facing a period of significant uncertainty

This report aims to highlight some of the key issues surrounding MampA market amidst the ongoing crisis and how the market is expected to pan out in the coming months

Wait till the dust settleshellip

3

INTRODUCTION

wwwsganalyticscom

4

SGA Whitepaper | April 2020

IMPACT ON MIDDLE MARKET MampAOver the past decade low-interest rates strategic buyers seeking acquisitions for growth and record private equity fundraising created a supply-demand imbalance that meant too much money chasing too few high-quality companies However the rapid spread of COVID-19 pandemic is expected to change the dynamics of MampA market in the coming months with participants trying to assess the true impact of COVID-19 on the business supply chain availability of financing growth prospects and other critical factors While a slowdown is inevitable its degree will vary depending on the business model strength of the balance sheet and management quality of the market participants

Currently there is a mixed level of activity which appears to largely reflect the uncertainty in the public equity markets Some new transactions both buy-side and sell-side are still coming in but at the same time certain existing transactions are being put on hold The transactions currently at risk appear to be the larger transactions while some transactions in the middle market are still moving forward Sell-side processes scheduled to launch are being put on hold but bankers are still being asked to get the businesses ready to go to market when things hopefully calm down However this is expected to change as COVID-19 spreads and its impact across markets is determined

For deals in early stages therersquos a lot of anxiety on the part of sellers and while the buyers remain cautious - there are some who are hitting the pause button to wait and see how the situation shapes up in a few months For sellers it is important that they focus on business and try to keep up operations to the extent possible

In challenging times availability of capital is a key consideration that influences MampA transactions Debt capital in the middle market remains available from both banks and non-traditional credit providers such as Business Development Companies (ldquoBDCsrdquo) and credit funds for many sectors For those industries most directly impacted by COVID-19 dynamics are changing daily and warrant frequent updating In addition to increased spreads in the near term it is likely that there might be more conservative lending behaviour displayed by credit providers BDCs and other credit funds are expected to move in to fill the void for middle market MampA appetite if traditional banks become more conservative in the near term

Source PitchBook

347

1144

55

(16)

94124

(125)

(273)

1207 11881300

1461

1278

929

Q1 2014 Q1 2015 Q1 2016 Q1 2017

Deal Count

Q1 2018 Q1 2019 Q1 2020

US Private Equity Deals ()

wwwsganalyticscom

5

SGA Whitepaper | April 2020

With a large number of companies anticipated to face margin pressures numbers are also bound to drop over the next two to three quarters This is expected to affect the valuation of companies and raise important questions for buyers - Does historical financial information represent a true reflection of the target that may now have a disrupted supply chain and inventory levels along with distorted accounts receivables Does the growth forecast and the underlying assumptions still make sense

Pricing in middle market MampA is dictated by various factors While the two important factors - availability of capital and the supply amp demand of quality businesses are intact concerns surround the growth prospects of target companies A definite impact is being witnessed by businesses which is set to hamper their growth for FY20-21 Transactions that happen this year are expected to include the clause of contingent considerations (ie earnouts) to be paid to sellers based on 2020 or multiperiod financial performance

An epidemic like COVID-19 brings a certain degree of uncertainty into the deal-making process Both buyers and sellers are looking at deal protection mechanisms for transactions which are currently being negotiated Market volatility and its potential impact on businesses will most certainly result in some sellers reconsidering whether this is the right time to market their business for sale Sellers will be concerned about achieving full value as well as being concerned about considerable uncertainty through the sale process as a result of potential issues with buyer funding and the detrimental impact on the business of lengthy deal processes

A Material Adverse Change (ldquoMACrdquo) with reference to MampA is a clause that aims to give the buyer the right to withdraw from the transaction upon the occurrence of certain events which are detrimental to the target company MAC clauses tend to receive a great deal of attention in the aftermath of significant events affecting the economy at large or a particular industry For example the events following 911and the financial crisis of 2008-09 saw a discernible increase in buyers invoking MAC clauses in agreements that were signed before that period

General categorisation on whether the COVID-19 pandemic is a MAC is not possible as in each case the analysis will depend on the specific wording of the provision at issue and the effects on the particular company The form and content of a MAC clause will vary from transaction to transaction and market practice in the relevant jurisdiction For ongoing negotiations for prospective transactions the contracting parties should give careful consideration to crafting the MAC provisions in light of the COVID-19 outbreak

The COVID-19 pandemic has reduced accessibility and physical meetings It has caused delays in due diligence activities including on-site inspections Advisers are resorting to the use of technology and using drones to help complete transactions Private equity firms have asked for drone footage to prove the existence of assets buildings and factory sizes and numbers The entire MampA diligence process is now expected to take longer than before with an increased focus on supply chain and customers The buyers will conduct a detailed examination on how the target has managed the supply chain disruption amidst COVID-19 For customers buyers will be looking at how COVID-19 impacts purchasing behaviour

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

4

SGA Whitepaper | April 2020

IMPACT ON MIDDLE MARKET MampAOver the past decade low-interest rates strategic buyers seeking acquisitions for growth and record private equity fundraising created a supply-demand imbalance that meant too much money chasing too few high-quality companies However the rapid spread of COVID-19 pandemic is expected to change the dynamics of MampA market in the coming months with participants trying to assess the true impact of COVID-19 on the business supply chain availability of financing growth prospects and other critical factors While a slowdown is inevitable its degree will vary depending on the business model strength of the balance sheet and management quality of the market participants

Currently there is a mixed level of activity which appears to largely reflect the uncertainty in the public equity markets Some new transactions both buy-side and sell-side are still coming in but at the same time certain existing transactions are being put on hold The transactions currently at risk appear to be the larger transactions while some transactions in the middle market are still moving forward Sell-side processes scheduled to launch are being put on hold but bankers are still being asked to get the businesses ready to go to market when things hopefully calm down However this is expected to change as COVID-19 spreads and its impact across markets is determined

For deals in early stages therersquos a lot of anxiety on the part of sellers and while the buyers remain cautious - there are some who are hitting the pause button to wait and see how the situation shapes up in a few months For sellers it is important that they focus on business and try to keep up operations to the extent possible

In challenging times availability of capital is a key consideration that influences MampA transactions Debt capital in the middle market remains available from both banks and non-traditional credit providers such as Business Development Companies (ldquoBDCsrdquo) and credit funds for many sectors For those industries most directly impacted by COVID-19 dynamics are changing daily and warrant frequent updating In addition to increased spreads in the near term it is likely that there might be more conservative lending behaviour displayed by credit providers BDCs and other credit funds are expected to move in to fill the void for middle market MampA appetite if traditional banks become more conservative in the near term

Source PitchBook

347

1144

55

(16)

94124

(125)

(273)

1207 11881300

1461

1278

929

Q1 2014 Q1 2015 Q1 2016 Q1 2017

Deal Count

Q1 2018 Q1 2019 Q1 2020

US Private Equity Deals ()

wwwsganalyticscom

5

SGA Whitepaper | April 2020

With a large number of companies anticipated to face margin pressures numbers are also bound to drop over the next two to three quarters This is expected to affect the valuation of companies and raise important questions for buyers - Does historical financial information represent a true reflection of the target that may now have a disrupted supply chain and inventory levels along with distorted accounts receivables Does the growth forecast and the underlying assumptions still make sense

Pricing in middle market MampA is dictated by various factors While the two important factors - availability of capital and the supply amp demand of quality businesses are intact concerns surround the growth prospects of target companies A definite impact is being witnessed by businesses which is set to hamper their growth for FY20-21 Transactions that happen this year are expected to include the clause of contingent considerations (ie earnouts) to be paid to sellers based on 2020 or multiperiod financial performance

An epidemic like COVID-19 brings a certain degree of uncertainty into the deal-making process Both buyers and sellers are looking at deal protection mechanisms for transactions which are currently being negotiated Market volatility and its potential impact on businesses will most certainly result in some sellers reconsidering whether this is the right time to market their business for sale Sellers will be concerned about achieving full value as well as being concerned about considerable uncertainty through the sale process as a result of potential issues with buyer funding and the detrimental impact on the business of lengthy deal processes

A Material Adverse Change (ldquoMACrdquo) with reference to MampA is a clause that aims to give the buyer the right to withdraw from the transaction upon the occurrence of certain events which are detrimental to the target company MAC clauses tend to receive a great deal of attention in the aftermath of significant events affecting the economy at large or a particular industry For example the events following 911and the financial crisis of 2008-09 saw a discernible increase in buyers invoking MAC clauses in agreements that were signed before that period

General categorisation on whether the COVID-19 pandemic is a MAC is not possible as in each case the analysis will depend on the specific wording of the provision at issue and the effects on the particular company The form and content of a MAC clause will vary from transaction to transaction and market practice in the relevant jurisdiction For ongoing negotiations for prospective transactions the contracting parties should give careful consideration to crafting the MAC provisions in light of the COVID-19 outbreak

The COVID-19 pandemic has reduced accessibility and physical meetings It has caused delays in due diligence activities including on-site inspections Advisers are resorting to the use of technology and using drones to help complete transactions Private equity firms have asked for drone footage to prove the existence of assets buildings and factory sizes and numbers The entire MampA diligence process is now expected to take longer than before with an increased focus on supply chain and customers The buyers will conduct a detailed examination on how the target has managed the supply chain disruption amidst COVID-19 For customers buyers will be looking at how COVID-19 impacts purchasing behaviour

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

5

SGA Whitepaper | April 2020

With a large number of companies anticipated to face margin pressures numbers are also bound to drop over the next two to three quarters This is expected to affect the valuation of companies and raise important questions for buyers - Does historical financial information represent a true reflection of the target that may now have a disrupted supply chain and inventory levels along with distorted accounts receivables Does the growth forecast and the underlying assumptions still make sense

Pricing in middle market MampA is dictated by various factors While the two important factors - availability of capital and the supply amp demand of quality businesses are intact concerns surround the growth prospects of target companies A definite impact is being witnessed by businesses which is set to hamper their growth for FY20-21 Transactions that happen this year are expected to include the clause of contingent considerations (ie earnouts) to be paid to sellers based on 2020 or multiperiod financial performance

An epidemic like COVID-19 brings a certain degree of uncertainty into the deal-making process Both buyers and sellers are looking at deal protection mechanisms for transactions which are currently being negotiated Market volatility and its potential impact on businesses will most certainly result in some sellers reconsidering whether this is the right time to market their business for sale Sellers will be concerned about achieving full value as well as being concerned about considerable uncertainty through the sale process as a result of potential issues with buyer funding and the detrimental impact on the business of lengthy deal processes

A Material Adverse Change (ldquoMACrdquo) with reference to MampA is a clause that aims to give the buyer the right to withdraw from the transaction upon the occurrence of certain events which are detrimental to the target company MAC clauses tend to receive a great deal of attention in the aftermath of significant events affecting the economy at large or a particular industry For example the events following 911and the financial crisis of 2008-09 saw a discernible increase in buyers invoking MAC clauses in agreements that were signed before that period

General categorisation on whether the COVID-19 pandemic is a MAC is not possible as in each case the analysis will depend on the specific wording of the provision at issue and the effects on the particular company The form and content of a MAC clause will vary from transaction to transaction and market practice in the relevant jurisdiction For ongoing negotiations for prospective transactions the contracting parties should give careful consideration to crafting the MAC provisions in light of the COVID-19 outbreak

The COVID-19 pandemic has reduced accessibility and physical meetings It has caused delays in due diligence activities including on-site inspections Advisers are resorting to the use of technology and using drones to help complete transactions Private equity firms have asked for drone footage to prove the existence of assets buildings and factory sizes and numbers The entire MampA diligence process is now expected to take longer than before with an increased focus on supply chain and customers The buyers will conduct a detailed examination on how the target has managed the supply chain disruption amidst COVID-19 For customers buyers will be looking at how COVID-19 impacts purchasing behaviour

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

6

SGA Whitepaper | April 2020

In the event of a prolonged crisis it is expected that following trends will be prominent in the MampA market

bull Well-capitalised strategic and financial buyers including activist hedge funds will use the opportunity to build sizeable positions in undervalued targets

bull Corporates will look to spinoff or sell non-core assets to address liquidity leverage and valuation issues

bull Large investors will look to contribute capital in exchange for significant equity stakes in businesses in need of recapitalisation or with liquidity constraints

Going forward balanced market conditions are expected to prevail in which prices for companies will fall to a historically normal range ndash referred to as a reversion to the mean As companiesrsquo earnings fall and the cost of capital rises to account for providersrsquo greater risk deals will not support pre COVID-19 prices

It is expected that there will be consolidation in hard-hit sectors where leading companies in the industry will acquire laggards to achieve synergies and scale and consolidate their leadership More than before acquirers will be seeking to acquire a company that has predictable recurring revenue This is much more valuable to an acquirer in the present situation where there is unprecedented level of uncertainty Generally SaaS businesses run on annualized contracts (two or three-year contracts) While this does not imply that all other businesses will have it tough in the MampA markets during and after the pandemic they will need to work harder than others to remain profitable and grow revenue Pharmaceutical medical equipment biotech online gaming online video streaming services home fitness online productivity online delivery e-learning online communication tools and workforce management tools are expected to see growth in the current crisis

Source Barclays

All stock consideration as of all global MampA announcedtransaction during financial crisis

18

12

28

21

20060

5

10

15

20

25

30

Fin

anci

al C

risi

s

o

f tra

nsa

ctio

ns

2007 2008 2009

Also there may be renewed use of equity as form of consideration for transactions among corporates prior to moving back to debt financing a trend witnessed during the financial crisis in 2008-09

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

7

SGA Whitepaper | April 2020

PERSPECTIVE OF STRATEGIC amp FINANCIAL BUYERS

After years of robust MampA activity COVID-19 and its associated economic impact upended 2020 expectations Strategic buyers have paused their deals indefinitely in response to share price sensitivity The share price of most public buyers has seen a significant decline over the past several weeks with depressed share prices come a few challenges for the corporate C-suite When that happens expansion and new initiatives becomes secondary while the focus invariably turning inwards to managing existing customers and ensuring smooth continuity of the ongoing business activities

Priorities of strategic buyers are expected to shift amidst difficult market conditions driven by the worldwide impact of COVID-19 Following are some of the key issues that companies will look to address in the coming months

Uncertainty created by COVID-19 has made companies look at their contingency planning with liquidity and cash flow preservation as the key focus areas A key decision today in the challenging market conditions is to choose whether to continue investing today versus preserving capital for tomorrow and assess the impact of these decisions on the companyrsquos future In the SampP 1500 year-to-date more than 40 firms have decreased dividends and more than 40 have suspended share repurchases as well

Near-term financial flexibility is critical during times of market volatility In addition to traditional capital markets corporates may look at alternative markets and monetization strategies such as private capital markets (eg convertible preferred) the recently announced Federal Reserve facilities (eg Primary Market Corporate Credit Facility) and corporate real estate strategies for meeting liquidity requirements

Another important category of transactions witnessing an impact of COVID-19 are spin-off transactions Most spin-off transactions are subject to fewer market restrictions than nearly all other MampA transactions and generally can proceed even in volatile equity capital-market conditions The spin-offs which are in advance stages are expected to continue moving forward For example - Arconic began regular trading on April 1 and Madison Square Garden Company recently announced that their spin-off date has been set for April 17

Source Reuters

World stocks vs COVID-19 confirmed cases

27 3 10 17 24 2 9 16 23-40

-30

-20

-10

0

10

8196163570

x1000

465915

-23

0

100

200

300

400

500

MSC

I AC

WI

ch

ang

eC

OV

ID-19 con

firm

ed cases

Jan 2020 Feb 2020 Mar 2020

Confirmed COVID-19 cases - GlobalConfirmed COVID-19 cases - ChinaConfirmed COVID-19 cases - United StatesMSCI All Country World Index rebased to Jan 22 2020

Strategic Buyers

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

8

SGA Whitepaper | April 2020

The last decade has been one of extraordinary growth for private equity (PE) Assets managed by the industry have more than doubled since the global financial crisis (ldquoGFCrdquo) with firms now managing more than US$38 trillion in assets However we now enter a period where the outlook is more mixed and uncertain

Like strategic buyers most General Partners (GPs) are focused on keeping current portfolio companies afloat rather than sourcing new opportunities As more is understood about the full effects of this pandemic analysts expect GPs to pursue PIPE deals growth equity transactions and carveouts and divestitures in greater numbers

In the short to medium term GPs are likely to hold portfolio companies during the pandemic rather than sell at deeply discounted prices In past economic crises such as the GFC PE firms chose to hold and median time to exit leapt by several years It is expected that GPs will utilize GP-led restructurings to keep portfolio companies under their ownership even if it is near the end of a fundrsquos life

There are likely to be more private investments in public equities (PIPE) in the near term as cyclical businesses look for cash when credit is hard to come by Many PE firms such as KKR and Apollo can leverage their own balance sheets to invest quickly and secure substantial stakes in publicly traded firms which tend to experience valuation declines more quickly than those in private markets

It is also expected that growth equity deals which had already been on the upswing to become an important source of financing in this difficult time Though there may be less economic growth in the short term minority stake equity investments in private businesses will allow PE firms to deploy capital at attractive prices without the need to secure new debt financing

As mentioned earlier additional deal flow is expected to come from carveouts and divestitures from conglomerates that are willing to part with non-core businesses in exchange for cash

Source PitchBook

US Growth Equity Deal Activity

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

438

557

$22

9

$40

5

$313

$18

4

$27

6

$28

7

$27

5

$35

8

$55

4

$46

0

$417

$54

1

$57

1

$47

4

485432

550636 629

770

849879

874

9511012

790

2018 2019

Deal value ($B) Deal count

However there are instances which indicate that companies have put divestiture plans on hold For example in January 2020 XPO Logistics had announced plans for strategic alternatives including the possible sale or spin-off of one or more of XPOrsquos business units However in March 2020 the company announced that it had terminated the strategic review process in light of current market conditions Similarly Synnex a US-based provider of B2B IT services has decided to delay its previously-announced plan to split into two separate companies citing uncertainties in the market caused by the COVID-19 pandemic

Financial Buyers

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

9

SGA Whitepaper | April 2020

Source PitchBook

Proportion of PE exits () to other financial sponsors

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

10

20

30

40

50

60

70

502579

With so many GPs in ldquowait and seerdquo mode exits via sponsor-to-sponsor transactions are likely to slow This impact will be significant as currently more than half of all PE exits are to other PE firms Strategic buyers too are pausing because it is so difficult to perform due diligence via video conferencing let alone complete on-site visits with most companies banning business travel IPOs are also not a great option with public indices down by a third and volatility spiking to the highest readings in a decade In general exits will be delayed until there is a recovery in asset prices and market conditions improve

It is expected that there will be delays for exits that have already been negotiated or are further along in the process may be limited to a few weeks or a couple months However transactions in more preliminary stages are likely to be pushed out six months to a year or more depending on the circumstances and how long this crisis persists This is not unusual and the pattern is quite similar to the global financial crisis when holding time steadily increased after the crisis Between 2009 and 2014 median US PE holding time expanded from 37 years to 62 years as GPs held on to battered companies and took extra time to enact value creation measures and ride the economic expansion

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

10

SGA Whitepaper | April 2020

PE firms today have more capital at their disposal than before with increasing participation from new entrants ndash including family offices sovereign wealth funds and high net worth investors ndash that are investing more actively in PE than before PE funds are currently estimated to hold more than US$14 trillion in immediately deployable funds and when other asset classes are added ndash credit infrastructure real estate growth capital etc ndash the aggregate amount of committed capital PE can readily deploy stands at more than US$26 trillion

The demand for private credit accelerated sharply post-GFC as banks retreated from lower and middle-market corporate lending For PE firms entering this market was a natural step forward Today private capital managers are booming lenders and have moved into financing larger corporations and other asset classes such as venture capital infrastructure and real estate This enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure

Source EY March 2020 Preqin

Private equity Real estate Infrastructure Private credit

The growth of private capital dry powder

200

6

200

5

200

4

2003

200

2

200

1

200

0

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

$0

$500

$1000

$1500

$2000

$2500

$3000

There is general consensus that the PE firms are better prepared than they were a decade ago to endure an economic downturn

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

11

SGA Whitepaper | April 2020

11

CONCLUSIONThe MampA market in the short term is expected to remain challenging until the number of COVID-19 cases reduce The impact of COVID-19 is becoming visible with announced deal activity in Q1 2020 slowing significantly The few new investments that GPs pursue are likely to be minority deals or smaller transactions that can secure financing Overall deal activity in the coming quarters appears to be on pace to plunge Transaction participants should take steps to mitigate the potential disruption to deal processes and timelines under the current scenario

Once COVID-19 peaks out with a decrease in the number of new cases and business activity picking up traditional MampA activity is expected to resume sometime in Q4 of 2020 This will be characterized by rising share prices increasing consumer confidence and improved financing conditions

The year 2020 will be remembered as one of the most challenging years in the recent history for global markets Not since the Global Financial Crisis of 2008-09 has such uncertainty gripped the markets worldwide

wwwsganalyticscom SGA Whitepaper | April 2020

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

For further information please visit our website sganalyticscom

Join the conversation

This document makes descriptive reference to trademarks that may be owned by others The use of such trademarks herein is not an assertion of ownership of such trademarks by SG Analytics (SGA) and is not intended to represent or imply the existence of an association between SGA and the lawful owners of such trademarks Information regarding third-party products services and organizations was obtained from publicly available sources and SGA cannot confirm the accuracy or reliability of such sources or information Its inclusion does not imply an endorsement by or of any third party

Copyright copy 2020 SG Analytics Pvt Ltd

Sharing Insights

Watch and enjoy our corporate videos

Click on the above title to watch the video

THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate

wwwsganalyticscom

12

SGA Whitepaper | April 202012

About the Author

Anshul YadavSenior Project Manager - Investment Banking amp Valuation

About SG Analytics For over a decade SG Analytics has been one of the leading global research amp analytics firmswith offices in USA UK Switzerland and India servicing scores of customers across the globe We are the partner of choice for Fortune 500 companies across several sectors We have been recognized as the ldquoBest Employerrdquo by the World HRD Congress in 2018

New York | Seattle | London | Zuumlrich | Pune | Hyderabad

RESEARCH | ANALYTICS | TECHNOLOGY

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THE CEO SPEAK Success Mantra of a Research amp Analytics Firm

Anshul has over 11 years experience in offshore investment banking and private equity support He has supported MampA teams of global banks and has been part of various buysell capital raising restructuring mandates across multiple sectors He holds an MBA in Finance amp Strategy from Management Development Institute (MDI) Gurgaon and is a CFA Level III candidate