While the global pandemic is bringing valuations down and putting processes on pause, some investors are still open to new M&A.
HGGC, a mid-market private equity firm, sees opportunities in the public markets and also looks to invest behind the companies where CEOs and management teams want to sell but stay involved, Rich Lawson, chairman and CEO at the firm, told PE Hub.
“We are getting a lot of calls because people can no longer go in the traditional process with a banker because everyone has shelved their processes for a couple of quarters. They are saying: ‘Hey, what can we do here that make sense? We want to stay involved, we want to be heavily invested in the business’,” Lawson said.
According to the investor, many companies that don’t have scale are now more inclined to partner with a larger PE platform amid the period of financial uncertainty.
“I think this situation is providing even more opportunities for middle market PE firms that are focused on a win-win partnership mentality with sellers,” Lawson said.
The firm also considers this time to be good for execution of buy-and-build strategies.
In the public markets, HGGC is seeing tremendous opportunity to take advantage of the dislocation.
The firm closely evaluates potential take-private opportunities – a strategy the firm has long been pursuing. HGGC identifies technology companies that are thinly traded, not followed, and have a market cap of $1 billion to $2 billion.
“Well now they are really dislocated,” Lawson said, “and this is an enormous opportunity.”
Besides looking for new deal opportunities, the firm is working closely with its portfolio companies to assess and act on impacts from covid-19.
Nearly two weeks ago, HGGC’s portfolio companies created bespoke internal covid-19 response committees to respond to challenges unique to each business.
Those committees are monitoring six “buckets” or groups of risks almost daily and update their assessments across the organization almost weekly, Lawson said.
According to Lawson, the risk groups include:
- Demand and revenue risk, where HGGC is working with each company to understand contract cancellations, slowing revenue and delay in bookings
- Supply and operations risk, where the firm is evaluating the effect of disruption on material shortages, cost flexibility and the entire supply chain landscape
- Capital structure impact, where the firm is focused on evaluating things like covenants compliance, revolver flexibility and liquidity needs
- Strategic impact, where the firm evaluates a strategic platform’s add-on acquisitions
- Investment impact, Where the firm evaluates the impact on exit timing expectations, and the potential to provide additional capital, if needed
- Health and safety, where the firm continues to work on virus containment and flexible work arrangements for 55,000 employees across the portfolio
While each portfolio company has created an internal group to address the scope of covid-19 impacts, on the firm-wide level, HGGC has refocused its operational resource group that now shares best practices around basic education, virus precautions, visitor policies, travel guidelines and communication protocols.
Action Item: Check out HGGC’s recent form ADV.