How SHIELD Framework Can Help PE Firms Benefit From COVID-19 Downturn

Published on 28 Apr, 2020

The global economy is heading toward the worst recession in recent decades, and it is well known that inaction is the riskiest response in such a situation for businesses. However, random and unthoughtful action can be as damaging as inaction. PE firms are no different, and they need to act quickly to reduce the impact on their existing investments. Aranca’s comprehensive SHIELD framework can act as a catalyst for PE firms to take well-informed and effective action(s) minimizing the COVID-19 impact and even reaping benefits from this downturn.

Recessions are a prominent part of the economic cycle and usually lead to crashes and bear markets. However, the current recession is different from the others to date as it is not confined to any single sector or geography. It has gripped the entire globe and affected all sectors. Ironically, recessions can be a lucrative investment opportunity for those who have the requisite foresight to act effectively.

The underlying reason for private equity (PE) firms’ outperformance potential is the ability to plan and invest over the long term. Historically, they have shown an ability to outperform public equity firms during recessions. The main reasons for this are as follows:

  1. In uncertain times, cash is always king. PE firms employ this adage and help portfolio companies sustain during a grim period by injecting the required working capital. With this help, the companies are able to capture market share and manage to stay ahead of competition.
  2. The downturn represents a buying opportunity for PE firms with high dry powder. They have an edge over their competitors and, thus, can plan and deploy funds at attractive terms or valuations over the long term. Their ability to act fast and take a long-term view gives them some important advantages.

Most PE firms are reacting to the ongoing crisis in a positive manner. However, are they taking comprehensive steps to minimize the negative impact and being proactive in capturing the upside in the current downtrend?

Aranca has developed a proprietary framework called SHIELD – a six-point crisis management framework for PE firms.

Aranca Shield Framework

As the name implies, SHIELD was developed to protect PE firms from the ongoing economic crisis and help them leverage the situation to their advantage.

  1. Set up a War Room: PE firms must create a dedicated team to govern and execute the necessary initiatives. The team should be equipped to coordinate daily and take decisions on the go. It is also essential to establish a common crisis response structure for portfolio companies.
  2. Help Portfolio Companies Sustain: PE firms must conduct an operational risk assessment for portfolio companies to identify business disruption. They must review and revise the valuation model to assess the overall impact on the business and infuse funds, if required, for working capital.
  3. Introspect & Reassess Strategy: PE firms must undertake diagnostic analysis of the fund and, if required, revamp the fund investment strategy. They must also design strategies for business continuity of portfolio companies and aid them to proactively adapt to changing market and consumer dynamics.
  4. Engage with Customers & Stakeholders: PE firms must help companies map critical stakeholders and develop a communication plan to maintain trust and reputation. Immediate focus on regular two-way communication through formal and informal channels will help maximize clarity and transparency.
  5. Liquidity Control Measures: PE firms must prioritize actions that have a direct impact on cash flow. A review of the balance sheet of portfolio companies will assist them to take important decisions regarding cash flow in the business. They must monitor performance regularly and respond with urgency.
  6. Devise a Recovery Plan & Deploy Dry Powder: PE firms must devise mitigation plans for stabilizing businesses and preparing them for a rebound in the medium term. They must plan strategically to take advantage of the crisis. Moreover, they must carry out post-recovery exit assessment for companies closer to the end of the holding period.

Aranca believes that time is of the essence and PE firms should find ways to make this crisis beneficial for them. We recommend that the PE community at large should consider adopting the SHIELD framework to help their portfolio companies effectively manage the ongoing economic crisis, and use the available dry powder to identify and invest in profitable companies or sectors trading at attractive valuations. Aranca, with its extensive experience of working with multinationals, startups, and investment firms across the globe, has developed a robust three-staged strategy that can help you capture the upside in the current downturn. Contact us to know more about the three pronged strategy.