Q&A: Private Equity and M&A Financing During COVID-19

March 24, 2020

For over 25 years, Josef Volman has built his reputation as a deal maker in the business community. He dedicates himself to partnering with clients, serving as their strategic advisor to drive growth and realize the maximum return on their investments. By devising creative, results-focused solutions, his clients are able to take their businesses to the next level, and by tapping into his vast network, he regularly facilitates capital raises and connects business partners to source deals. He can be reached at jvolman@burnslev.com or 617.345.3895.

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Q. How are COVID-19 issues currently affecting the M&A and private equity side of finance?
Volman: It is a mixed bag. Some deals are on hold and other deals that were scheduled to receive indications of interest or letters of intent have been put on hold until the deal climate returns to normal. On the other hand, we are involved in several M&A transactions which are past the letter of intent stage and are still on target to close. Some of those businesses are in healthcare or healthcare IT, which are even more critical during this pandemic. Others are in financial software or other industries where the buyers still believe that the overall long-term value of the business remains strong. Many of our deals tend to be middle market or lower middle market deals, which are less affected by large amounts of debt capital and can be closed with mostly equity. Overall, there is definitely a more cautious approach to transactions and we expect the level of M&A activity to slow in the near term.

We are also seeing that our private equity clients are spending most of their time working with their current portfolio companies to revise budgets and develop strategies to survive during this economic downturn. We are working with several private equity portfolio companies on employment issues, bank covenant issues and customer and vendor issues that they are facing as a result of the crisis. However, once the private equity firms can shore up their portfolios, we expect that new deal activity will come back quickly once there is a full assessment of the effect of the pandemic on the businesses that are coming to market.

Q. Does the COVID-19 disruption qualify as a material adverse change (MAC)? Do you expect to see deals fall through based on the triggering of MAC clauses or are deals moving forward despite this current crisis?
Volman: Using the generally accepted definition of Material Adverse Change or Material Adverse Effect that come out of the Delaware cases, as of right now, it is too early to determine whether the current pandemic would qualify. Most clauses in M&A agreements cover an epidemic or natural disaster that has a long-term effect rather than a short hiccup. It is looking like there might be a long-term effect, but as of now it is very early in the crisis to draw a definitive conclusion. Lawyers are great at adapting agreements to situations that have arisen, so it is very likely that language covering a pandemic will find its way into M&A agreements going forward.

Q. Are there some industry segments being impacted more negatively than others in the deal space? Any bright spots in the M&A and PE space?
Volman: Industries that are consumer facing, such as restaurants, are facing serious issues, and several of our restaurant deals have been placed on hold. On the other hand, companies that are solving the pandemic-related problems like remote healthcare are getting attention. Our financial ecosystem tends to respond to opportunities, so we are hearing that many private equity firms are viewing this as a potential opportunity to buy companies at more reasonable valuations. There is great data which show that private equity firms that bought companies following the last economic downturn in 2008 did very well with those companies.

Q. Could a pause now, while COVID-19 is being contained, lead to a rush of deals later in the year?
Volman: That is the hope. Before this pandemic, our deal pipeline was very strong. We closed several deals in January and February and had several others that were preparing to come to market in March, butt were put on hold. I believe once the assessment of the pandemic’s effect can be reasonably calculated, there will be a very big push to close deals before the end of the year. These businesses were very strong and assuming they can show projections that are strong for future years, there should be a return of deal flow.

Q. What are the potential challenges for M&A and private equity following containment of the virus?
Volman: The biggest challenge will be calculating the full impact on each business. For example, if a business has substantial international operations, it could be difficult to assess the recovery in other parts of the world. Many deals are also dependent on senior and mezzanine debt, which makes them dependent on federal interest rate policies and other government actions to ensure that lenders can continue to finance M&A transactions.

Q. What is your long-term outlook for M&A and private equity?
Volman: I continue to be optimistic that the long-term outlook will be strong. Many private equity firms raised money over the last few years based on their strong exit events, and they will have plenty of capital to deploy once they get comfortable with the businesses they are buying. Many value investors have been on the sidelines waiting for valuations to come down a bit, which is likely to happen as a result of this global health crisis. Those private equity firms will be ready to buy in a more value driven deal environment. Also, many private equity firms have become sector focused and will have a good sense of the likely survivors in a particular sector. We were very active in both sell side and buy side deals in 2009 and are hopeful that is what we will see towards the end of this year and next year. Dealmakers like opportunities and they like to do deals, and I predict M&A deals will come back stronger than ever once this crisis ends.