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Covid-19’s Silver Lining for American Capital Markets

Covid-19 may someday go away, but the accelerated digitization it has thrust upon American private and public capital markets is permanent. And that’s a good thing.

The new normal by which investors and companies connect, exchange information and transact will present opportunities everywhere for adaptable companies, M&A advisors, and professional investors. Entrenched incumbents, whose advantages are anchored to a sunsetting analog paradigm, are all the more on notice.

Below are three of the most significant Covid-19 driven changes to capital markets, M&A activity and dealmaking:

1. Deals can now get done 100% virtually, and so they will get done 100% virtually.

Almost overnight, many sellers, buyers, founders and investors successfully found a way to transition the heavily in-person M&A process into something 100% virtual and remote-friendly. Nothing short of a wholesale economic and travel shutdown on the magnitude of Covid-19 could have wrought such change so quickly.

Here are four proof points that prove that the above isn’t merely a prediction:

1 – This one from the world of small business M&A, courtesy of Axial member Stuart Robles of Briggs Capital, a boutique M&A firm in Boston, MA:

Virtual Deal Making and the Rise of Contactless M&A

2 – Examples abound in the world of venture capital, where Zoom and Google Hangouts meaningfully pre-date Covid:

14 Founders who Raised $200M During Covid-19

3 – Limited Partners (LPs) are writing big checks remotely as well. Unsurprisingly, it’s most visible with the more known quantities in the GP world:

Steve Schwarzman on the Reality of Raising Capital Over Video

4 – Even the high-stakes work of IPOs has largely been a virtual affair. Roadshows for both recently formed technology companies like Vroom (VRM), as well as old-line media companies like Warner Music (WMG), have all been executed 100% remotely:

Virtual IPO roadshows could become the new post-crisis standard

The practice of doing solely in-person management team meetings is quickly becoming a relic of the pre-Covid-19 era. In-person meetings, relationship building, final diligence meetings, and general T&E aren’t going away, but the defaults have switched, and the presumption that they are a requirement in professionally executed deal processes has been permanently challenged.

2 – In-person Dealmaker & Business Development conferences that don’t re-invent will die off.

In-person content-oriented conferences will become less compelling, and the market will move towards remote-friendly streaming formats. Even networking-heavy, business development oriented conferences are going to be challenged by the digital medium.

Here again, I point to concrete examples.

After postponing twice, the Milken Institute’s flagship Global Conference capitulated to digital this year, with extraordinary results and record levels of engagement. One of the most hobnobbing-heavy conferences in the business world, it will likely bifurcate in future years, offering a live-streaming pass that accommodates content-oriented attendees and virtual breakout room networking, and then developing new in-person offerings that create “Zoom-proof” reasons to attend in person.

Similarly, Axial converted its 2020 flagship conference series, Axial Concord, into a series of 100% digital conferences.

Axial Concord is exclusively centered around private 1:1 deal-sourcing opportunities for lower middle market CEOs, investors, and M&A advisors. It is a zero-content conference. At each digital Concord, Axial had facilitated over 500 private 1:1 zoom meetings for ~100 “attendees”. It is 100% virtual, and has required a completely brand new set of processes to execute.

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We originally assumed that Axial Concord conferences would return to an in-person format once Covid-19 and its considerations subsided, but our attendees don’t want that. We surveyed Concord attendees about their virtual Concord experience and were stunned by the responses:

This photo shows that Axial conference attendees prefer virtual conferences by more than 2 to 1 over the historical in-person conference format.

Conference producers and organizers who assume a vaccine or other solution to Covid will return the market’s preferences to the prior in-person paradigm do so at great risk. Conferences have changed permanently with transformational implications for programming, pricing, production and logistics.

3 – M&A Due Diligence checklists will now forever have a “Pandemic Preparedness” module.

Overnight, an entirely new module is part of every M&A due diligence process, and pressure-test company’s production processes, remote work capabilities, financial impact scenarios, and many other considerations.

If you’re a manufacturer:

  • How is hygiene maintained on your production lines during a pandemic?
  • How do you manage staff social distancing requirements and modify production shifts?
  • How adaptable is your labor supply to emergency protocols?
  • What new equipment must your facility have to ensure safety and quality measures?
  • How have you modified your supply chain to avoid single points of failure?

For healthcare facility operators:

  • How do you admit, triage, and discharge patients?
  • What equipment do you have and in what quantities?
  • What are your testing, tracing and isolation procedures and protocols?
  • How does insurance pricing and related risks evolve to protect your employee and malpractice liability risks?

For retailers:

  • What is your e-commerce strategy?
  • How omnichannel are you?
  • How omnichannel can you become?
  • How should the in-store experience change?

For B2B sales organizations:

  • Will your sales organization become an inside sales organization?
  • Is that possible given the complexity of the product / service you offer?
  • Can your existing sales organization handle a transition to that newly dominant sales modality?

In March / April 2020, the world at large collectively held its breath, hoping the worst of Covid’s public health and business disruptions would be behind us by summer. In the following months, businesses, governments and communities have had no choice but to adapt and innovate into new ways of living life.

For the world’s entrepreneurs, M&A professionals, and professional investors, Covid-19 has accelerated the “installation phase” of a digital-first capital market paradigm. Covid-19 is presenting a new set of challenges to getting deals done, but over the medium-term and beyond, the digitization it has imposed increases the democratization and the velocity of private and public capital markets. Hopefully we can all agree that that is a good thing for entrepreneurs, for the capital market participants who finance their endeavors, and for America’s long-term competitiveness.

This article was originally published on LinkedIn newsletter Private Capital Matters

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