Are PE funds going to be sued?

Private equity funds should definitely rethink their strategies.

If there’s a deal on the table, funds cannot just rescind their offers.

They cannot expect to walk away with a “force majeure” technicality.

That’s not how this business works.

They should sit at the table with the companies they wish to invest their money in.

They should have a plan of how they may jump this hurdle – together.

The silent partner

It is no wonder that Covid19 had shuffled the cards the way it has.

More and more funds, as well as their portfolio companies, now dread tomorrow and what it may bring.

Despite indices going up in stock markets globally, the impact of this pandemic is yet to really be seen.

Yes, a 27% unemployment rate in some countries is never a good sign.

Having said that, employees who have been furloughed would be returning once lockdown ends.

Naturally, some would have nowhere to return.

Companies which have had negative cash-flow could only sustain themselves so long.

Playing that hand

Covid19 is quite the joker in this game of cards.

Even the Spanish Flu, which eradicated around 13% of the world population at the time, didn’t impact the economy as Covid19 has.

But why?

Covid19 has emerged in a time where social media dominate the scene.

Social media has created world-wide panic over this disease.

Despite numbers being smaller than regular influenza (the flu) show annually, Covid19 is being treated completely differently.

It is new, it is aggressive and it is the unknown – which is what created this dread from the get-go.

The information age has brought knowledge to everyone who is willing to type stuff into Google.

But when something new arises, that not even Google could answer, is when people start to panic.

What Covid19 has done to the economy

The world has sustained far worse than Covid19:

  1. The Black Plague (from the 6th to 14th centuries)
  2. Cholera
  3. The Asian Flu
  4. The Spanish Influenza

None of them impacted the global economy the way Covid19 has.

The reason is that people have become too cautious, which is why lockdowns have created effective barriers all over.

Borders in areas such as the EU were closed, for the first time in over 50 years.

Everyone is suspected of being a host for the virus, which has fueled the hatred of the conservatives in many countries.

Unemployment rates have gone higher than the ones previously marked during The Great Recession or the Sub-Prime Mortgage Crisis back in 2009.

Rethinking the strategy

Private equity funds are being sued left and right.

Reasons vary from not paying enough attention, to downright rescinding offers.

Some of them even had money in an escrow account, and are now looking for legal loopholes to get out.

But what they seem to forget is that the companies which they struck deals with are dependent on that investment.

Yes, not all of them are worth the money from the get-go, but there might be a way in which both parties may save face.

Being called “a fraud” is not pleasant.

The public may forget, but the internet would always remember.

This may definitely put them in a bad light, which is not something considered “good business”.

What tomorrow may bring

Contrary to common belief, the sun would definitely shine tomorrow.

Deals that have been struck six months ago would go into motion.

Funds should definitely not rescind their offerings, as they won’t be in Hades next week.

The world must continue in its course.

What it has created is a need for better due diligence to be done, by both funds as well as startups.

Valuation may be lower, but venture capital and private equity offer the lifeline needed to many startups.

Which is why funds should rethink stagnation strategy and better prepare themselves, to avoid what happened to Advent and Softbank.

Leave a Reply

Your email address will not be published. Required fields are marked *