The coronavirus (COVID-19) outbreak is causing widespread concern and economic hardship for consumers, businesses and communities across the globe. The situation is changing quickly, with widespread impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know: crisis management and response, workforce, operations and supply chain, finance and liquidity, tax and trade, and strategy and brand.
Most companies already have business continuity plans, but those may not fully address the fast-moving and unknown variables of an outbreak like COVID-19. Typical contingency plans ensure operational effectiveness following events like natural disasters, cyber incidents and power outages, among other crises. They don’t generally take into account the widespread quarantines, business and community disruptions, extended school closures, and added travel restrictions that may occur in the case of a health emergency.
The crisis raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.
Here is our take on some issues that companies in your industry may face:
As PE firms’ ownership of underlying companies isn’t designed to be long term, these companies may have less robust contingency plans for dealing with this type of emergency. Additionally, scenario planning conducted by PE firms upon acquisition doesn’t typically cover this type of situation.
PE firms may be facing a situation in which they have multiple underlying companies with hundreds or thousands of employees looking for guidance and direction during this crisis.
While cybersecurity is always a top priority for PE firms and their portfolio companies, they may face additional threats and vulnerabilities now. This is because they will have significantly higher levels of remote access to core systems, along with employees and management who could be more susceptible to social engineering efforts in the midst of a crisis.
Portfolio companies often don’t have the HR expertise and infrastructure required to manage during a crisis, so they may seek guidance from their PE sponsors to help them effectively address workforce issues. PE firms should leverage their resources to provide necessary guidance to their portfolio at scale.
Due to the different needs, strategies and capabilities of each underlying company, PE firms have to wrangle a diverse host of workforce issues. Office-based businesses may seek guidance on work-from-home provisions, whereas manufacturing facilities face different safety and continuity considerations. Geographic diversity and local government regulations also come into play.
Without the right monitoring and planning, PE firms could be overloaded with issue after issue, causing a fire drill every time. Additionally, HR policies and directives may be inconsistent within and across the underlying entities.
Upon acquiring a company, many PE firms focus quickly on making changes to indirect spend (such as office supplies, travel, shipping), and they entrust the underlying company to handle direct spend (materials needed to make revenue-generating products).
Further, if the underlying company is in a specialized industry (for example, biotech), expertise in sourcing vendors that are not affected by the virus may take time and effort that it cannot afford. Indeed, it’s possible that a third-party provider may prove to be a critical point of failure in creating a response to COVID-19.
The crisis may not hit every geography equally. In areas that have been particularly hard hit, PE firms could be trying to adapt quickly to new rules and deadlines. In other areas, they may still need to comply with traditional filing and compliance deadlines.
PE firms should also evaluate how an impact to operations of the portfolio company (from reduction in normal operations, business interruption or non-recurring expenses) may be treated from an indenture perspective in their lending agreements. Depending on the potential add-back, they may need to track and monitor those costs and losses.
There are a host of hidden tax issues that can affect a company’s decision-making process during this crisis. For example, choosing the wrong backup vendor could expose a firm to an unplanned tax burden because of vendor location changes or other reasons.
This crisis is demonstrating to PE firms the importance of improving risk strategy. Some firms are even thinking ahead to what tools and technologies they can use to help anticipate this type of risk in the future.
Given the level of debt present on most portfolio companies' balance sheets, some firms may face increased liquidity risks and unanticipated challenges with their ability to make interest payments and avoid defaults. Portfolio companies may also encounter cash-flow problems should customers be unable to pay.
Beyond these pillars, each industry will need to address some subtleties of its own. While many companies are adapting to travel restrictions, these have unique ramifications for airlines and hotel operators. The precipitous drop in oil prices may be a benefit to some companies, but not those in the energy sector. Here, we highlight some specific considerations for private equity firms and offer some guidance on ways to respond to the challenges.
In the weeks since the COVID-19 outbreak, customer behavior has drastically changed, regardless of whether you are B2B or B2C. Consumers are staying at home and have shifted their consumption habits toward those products needed to survive the crisis. Additionally, companies have had to ramp down production and slow their purchases.
For PE firms, this means a drastic shift in ongoing business strategy. Companies that cannot adapt could be struck with the kind of disruption that dampens business or, in the worst case, ends a company’s prospects for survival.
Generally speaking, private equity firms do not allow redemptions, thereby avoiding the investor issues that affect other fund classes. However, investors can demand full transparency when it comes to a PE firm’s actions in this crisis.
In dealing with COVID-19 issues, PE firms could lose sight of basic investment company issues, such as commitment call deadlines, financial statement filings and shareholder updates.
In a time of global uncertainty, it’s easy to lose sight of the big picture. This is particularly true when the memories of the last recession are still relatively fresh. But it’s worth recognizing just how different the current situation is from where we were a decade ago:
This is why it makes sense to go back to first principles: What is your company’s mission? We encourage our clients to start determining the few differentiating capabilities they need to thrive. Even in a crisis — or especially in a crisis — you’ll want to double-down on the things that make your organization unique.
Eventually, this crisis may even present some opportunities for the industry to transform and excel. For example, for the past few years, PE firms have been amassing a large amount of “dry powder,” which could be deployed to make purpose-driven business decisions that could help businesses move beyond the crisis. PE firms have an opportunity to deploy this capital in a way that reflects the environmental and social expectations of the larger market.
For some companies, the COVID-19 crisis may highlight some issues that have needed attention for a while but can no longer wait. When your team can’t get to the office, you may discover how many manual workarounds your company has put in place for routine activities.
Suddenly, finance and human resource transformation becomes more important. When your data centers are located in affected areas, or scammers try to take advantage of market noise, cloud transformation and fraud/economic crime solutions become a higher priority. A few areas where we have seen leaders focus on improvements include:
Whether you’re trying to protect business integrity, empower your people, make better or faster decisions, or transcend through technology, it helps to take a long view. Once this COVID-19 crisis passes — and it will — where do you want your business to be?
For more than a century, our purpose — to build trust in society and solve important problems — has been at the core of everything we do. We stand ready to help you.
Private Equity Leader, PwC US
Principal, Workforce of the Future in Deals, PwC US