Portfolio Company Crisis Management — COVID-19 Virtual Roundtable

Yesterday, we brought together eight Axial members, including private equity, lenders, and family offices, for our second virtual roundtable on the coronavirus pandemic. (Watch the first roundtable here.) This discussion focused on portfolio company crisis management. What does cash and liquidity planning look like in this new reality? To what extent are lenders still doing deals? How will this week’s stimulus bill help PE-backed portfolio companies? Are portcos putting a pause on add-ons? 

Thanks to the following Axial members for their time and insights: 

• Hugh Browne, Managing Director, P4G Capital Management (PE)
• Joe Burkhart, Managing Director, Saratoga Investment Corp (Lender)
• Chris Cathcart, Partner, The Halifax Group (PE)
• Michelle Chao, Director of Investor Relations, Bertram Capital (PE)
• Mark Danzi, Managing Director, Mangrove Equity Partners (PE)
• Barrett Dean, Co-Founder and Partner, Craftsman Capital Partners (PE)
• Ken Heuer, Principal, Kidd & Co.(family office)
• Istvan Nadas, Vice President, Dunes Point Capital (family office)

Video:

Axial Virtual Roundtable: Portfolio Company Crisis Management from Axial on Vimeo.

Audio:

Show Notes 

Intros: 00:00-15:40

Stimulus Bill 15:40

• $350B chunk for small business loans – tied to payroll preservation, can be treated as grants (available to SBICs) 
• Affiliate test: if you have have three companies in a portfolio and there are 250 employees at each company, you are considered to have 750 total employees, so you fail a 500 employee test
• Private Equity backed companies are effectively all blocked by this bill because of the above
• The affiliate test will only be removed for the hospitality and lodging industries, and SBICs are also waived
• Uses of the money include payroll, rent expenses, utility expenses
• Question: if a family office co-invests with SBIC but is the control investor, do they qualify for the funds?
• Historically, there have been amendments that have followed bills that are put together so quickly; this is the hope, because if PE can’t access these tools, ultimately it impacts the labor force

Business Continuity Plans 26:35

• Some firms are using the “Divide & Conquer” method: Divide the portfolio and dedicate specific team members to specific companies
• Employees – how do you take care of your people?
• Cashflow forecast: how does that educate your spending or spend cuts
• TripActions, which raised $250M in Q4 last year, laid off a significant number in its workforce already; where else is this happening?
• More planning seems to be going on right now versus action (layoffs, furlough, etc.)
• Some firms are giving their employees options: furlough if they’d like it, the option to work at night so they can take care of kids during the day
• When Michigan enacted a stay-at-home order, they temporarily expanded eligibility and benefits under their unemployment guidelines and the federal government is expected to do the same thing
• Some insurance companies are taking late payment
• Medical device manufacturing business has been working overtime because they’re not sure when there will be an illness on the manufacturing floor that could be a major disruption in future manufacturing capacity
• R/V dealerships in the midwest (service and repair is considered essential, but showrooms are not considered essential; need to move to virtual selling where possible, but counter workers may need to be furloughed

Recurring Revenue Business Disruption 39:10

• Print magazine with hyper-localized advertising; a lot of these businesses will be affected so they expect an impact in the future, even though they haven’t seen any immediate hits

How Management Teams Are Communicating With Their Companies 40:55

• The best managers were already looking at revolvers and creating action plans before they were asked
• Open and direct communication style is best received by both the investor and the employees – daily calls or meetings to keep people updated in real time
• It’s important to be direct about things like: PTO, work-from-home policies, what do you do if you get sick, do you have benefits covered by the company
• When companies have to make moves like furloughs, they’re communicating that the hope is this is very temporary and that people will be able to return to normalcy soon

Liquidity Planning 46:35

• 13-week cash flow forecast is the expected norm
• Creating multiple scenarios for cash flow (worst case, baseline, and bullish)
• Looking to figure out how to provide as much runway as possible
• It’s better to err on the side of transparency with lenders and let them know now if you have concerns so they can be part of the solution.
• Outline extreme cost-saving measures like furlough, salary reductions in case they’re needed
• Lower-middle-market still has covenants, but it will be interesting to see how the upper middle market deals since they don’t have them
• Rent: adjustments to leases is likely going to be part of the solution across the board
• There is likely going to be an alternate reality for a lot of companies moving forward, and plans should take that into mind

Duration 54:35

• Certainly through June 30th
• In looking at contingency planning, six months of flexibility is much better than three
• Take as much flexibility as you can get from lenders, landlords, etc.
• Mangrove is shutting off management fees at all of their portfolio companies this month; if you’re going to ask other companies for accommodations, you need to be doing your part and sharing the pain

Tech Companies 57:10

• It’s all about the end market
• If a company has an end-market outside of those that are hard hit (hospitality, travel, etc.), they’re likely going to survive without too many long-lasting effects 
• They can turn off R&D, can eliminate sales positions

Healthcare-Related Businesses 59:25

• Dental – dentists are on the front lines of being at risk and their patients don’t want to come; some are open for emergency services only
• Home health – therapists are having trouble getting access to hospitals and patients can’t be brought home
• Medical Device Manufacturers – Can you modify capabilities to manufacture ventilators (can be exploited for a new business opportunity)

Add-On Opportunities 1:04:55

• Being discussed with relevant portcos, but there is concern that there will be a lot of companies in the lower middle market in particular that are not well managed or not well capitalized that will end up coming out of this in distress
• For companies that are experiencing high demand right now (or expecting in the near future), one of the fastest ways to scale supply is by acquiring one of the companies who couldn’t make it through this crisis alone. Will begin looking in a few weeks or months.
• Scheduled to close two add-ons on March 31st and all three business are seemingly doing okay, but management teams are so busy managing the entire situation that the question became how you’d handle a closed transaction; do you expect management teams to drop everything and come together around the acquisition the day after it closes, do you pretend like the acquisition didn’t happen for the first 60 days after it closed? Is it even prudent to write the check in the middle of all of this?
• It’s hard to answer the question: when will you close? The answer is when there is visibility
• It’s in no one’s best interest to close in the midst of this without any clarity around when or where people are working

Repricing Deals 1:12:54

• Even if a business isn’t going to change long-term, it is likely going to face changes in the interim
• Sellers are going to have to get comfortable with this new reality

How the Lending Market is Responding to Refinancing 1:17:00

• Lenders, even if they have a lot of capital, are being careful right now
• The only loans being right now are by-and-large asset-based loans
• New lending is going to be slow for a bit; expect at least a month