Normally when I write a blog post, I have a knowledge base about and experience with the topic. This post is different because this situation is unfolding in real time and is unlike anything that we have experienced in the US in at least 100 years. By the time you read this, outcomes could be more apparent and my viewpoints may be proven wrong. The pandemic and economic shutdown began negatively impacting businesses in early March, and even earlier if you were sourcing from Asia. The full effect of the pandemic on US and world economies will not be known for many months and possibly even years.
THE STOCK MARKET
Investors like predictability and this lack of certainty about the impact or timing of a recovery disrupts their usual processes. This uncertainty is reflected and measured every day in the wild swings in the stock market, which appears to react in extremes in both directions to any sliver of positive or negative news. It is also manipulated regularly by The Federal Reserve, who is taking a bare-knuckled approach to resisting a full recession, and by the programmatic trading computers that makes virtually every trading decision on Wall Street.
But that’s the public equity market. What I want to address is the private market. Its great virtues include that it is private, less efficient and managed by professional PEOPLE! As a result I believe it has been more rational, more steady and a better indicator of where the economy is going than the public equity market and Wall Street have.
THE PRIVATE MARKET
Nobody likes a recession and certainly no one likes a pandemic, but from a private equity perspective it is this type of event that resets rational behavior and sets the stage for the next new opportunity. Ten year record-breaking expansions are a wonderful thing. All boats rise! But when all boats rise it makes it more difficult for private equity investors to identify truly unique forward-thinking value propositions and outstanding management teams versus average ones. Why is it difficult? Because when all boats are rising, all are doing well, and the conditions aren’t such that they expose the true quality of an organization. An observer would be left evaluating varying degrees of corporate success, rather than success of some enterprises vs. failure of others.
The businesses many private investors want to invest in, many of whom did not exist 10 years ago before the last recession, are now battle-tested and that is worth a lot! There is still almost a trillion dollars of private capital waiting to be invested. Banks remain well-capitalized and ready to lend thanks to the “gloves off” approach taken by the Federal Reserve to resist a deeper recession. So the playing field is reset with different investment priorities needing to be matched with the tremendous amounts of capital still waiting to be invested. M&A activity took somewhat of a 2-month hiatus, and now will be bit backed up at least for a quarter as the supply of businesses winds its way through the pipelines on the M&A calendar. Many businesses that were in the market to be sold in Q1 could not obtain financing as banks took a wait and see approach. Businesses going to market originally in Q2 are waiting to maximize PPP loan forgiveness and to assess buyer appetite for new acquisitions. But the real winners are those newly-recognized, game-changing businesses that went a few rounds with the COVID pandemic and won. They will be found quickly and receive a well-deserved premium from opportunistic buyers with cash to burn. Sadly there are many businesses big and small, indeed entire industries, that may likely never recover and potential buyers will be standing by seeking to take advantage.
This pandemic-led recession is no different than any other recession from the perspective that it resets the M&A cycle. The true difference is that consumers, business professionals and economic prognosticators are not dealing with the same variables and economic indicators that have served them so well in the past.