Value Creation Forum: Beware companies with ‘covid steroids in the system’

Private equity firms must be cautious of businesses that look deceptively appealing because of the pandemic, a virtual conference has heard.

Speaking at Private Equity International’s Value Creation Forum: Asia last week, Tim Sims, co-founder and managing director of Australia’s Pacific Equity Partners, said certain assets are being put up for sale while enjoying a spike in activity relating to the health crisis.

“There are people wanting to sell right now because they’ve got covid steroids in the system,” Sims told delegates.

“The other reality we face is there are many businesses that ought to seek new ownership but don’t want to sell now because they don’t look great after the year we’ve just had.”

PEP closed its sixth flagship on its A$2.5 billion ($1.85 billion; €1.52 billion) hard-cap in July. The firm has completed two private equity investments this year, acquiring utilities business WINconnect in March and educational resources supplier Modern Star in December, per its website.

“There’ll be a strange disconnect in dealflow where we get presented with the things that we probably shouldn’t buy at the prices that are expected,” Sims added.

“We don’t get presented with the businesses we really want to buy, because they don’t look pretty after the last 12 months. We know people who want to sell businesses who’ve asked us to wait for six months until the accounts look more normal.”

Asia’s dealmakers have been on a tear during the pandemic. Private equity deal value in the region hit $95 billion for the first three quarters of 2020, more than double the $41 billion invested over the same period last year, according to EY’s PE Pulse Q3. This compares with a 45 percent decline in the Americas and a modest 2 percent rise in EMEA.

Sims was joined on the panel by Abhishek Kapur, managing director at KKR Capstone – the operations unit tied to private equity giant KKR – who said that private equity must “resist near-term flashes” and continue to assess investments on a five to seven-year horizon.

“In many cases that means overlooking, or at least downplaying, the near-term impact of covid because the long-term fundamentals of a particular business may actually be still very strong [and] in some cases may be stronger,” Kapur noted.

“We need to still maintain the strength of private equity as an asset class and ownership model, which is [to] look long-term and look beyond the veneer of what the immediacy is showing us and keep that discipline within ourselves.”

Sims and Kapur were also joined by Sean Epstein, global head at SAP Private Equity; Alvin Lam, principal at CVC Capital Partners; Kiran Rao, operating partner at TPG; and Kyle Shaw, founder of ShawKwei & Partners.