Law360 (August 14, 2020, 11:16 AM EDT) -- In this installment of Coronavirus Q&A, the co-leader of Sidley Austin's private equity practice discusses the continuing effects of the pandemic on the state of the market for mergers and acquisitions and private equity investments, and he explains how COVID-19 has affected his day-to-day personal and professional life.
This interview has been edited for length and clarity.
From your perspective, how has the coronavirus pandemic impacted the state of the M&A and PE industries at large?
Like all sectors of the economy, it has been a rollercoaster. Deal activity initially slowed to a trickle as investors and companies first focused inward on their own operations and existing portfolios. Also, at the outset, no one knew how to value businesses for sale because of the uncertainty of the impact of the pandemic on continued business performance and cash flow.
While I believe overall deal activity level remains low, there has definitely been some pick-up, especially over the past several months, and especially for businesses that have either not been significantly impacted by the pandemic or that have been able to quickly pivot their business model and adjust to the current environment.
How has the coronavirus affected Sidley's PE practice, both at first and in the months since the pandemic began?
At the outset, when deal activity slowed, we remained busy advising our clients on a wide variety of issues facing existing portfolio companies and fund operations, including capital needs, government stimulus opportunities, employee and other working from home concerns. Early on, we also advised some of our clients with investments in rescue and other opportunistic capital situations.
We've been fortunate because we represent a wide variety of sponsors and companies across a number of different industries and investment strategies, so we have continued to see strong activity across certain sectors, including tech and tech-enabled business, certain segments of health care and life sciences, insurance, payments, and other financial services. We've also been very busy advising sponsor clients on SPAC transactions, PIPEs, IPOs and other capital markets deals. Sidley's investment in certain industry verticals and the diversity of our practice has been quite helpful in this environment.
How has the pandemic led to changes in the dealmaking world, in terms of the lack of face-to-face interactions and the need to do things remotely? Are clients embracing this new normal?
Honestly, I don't think this has been a big issue for dealmakers. Dealmakers have long been accustomed to transacting by phone and email. Zoom and other video conference platforms have helped bridge the gap when an in-person meeting would have otherwise been helpful. Management presentations and roadshows have successfully been done by video conference.
Purely from a relationship perspective, there is still something to be said for meeting someone in-person and getting to know your client or the management team of a company you are about to buy, so that is the one struggle in all of this. We have hosted some online roundtable events to get clients together so they can trade ideas amongst themselves. We moderate those, and it's a way to stay connected to clients and allow them to share best practices and discuss questions they've been thinking about.
At the end of the day, it's the blocking and tackling of picking up the phone, reaching out to clients by email, and not just from a work perspective, but a personal perspective. More recently, with local clients, I've had the opportunity to meet some of them for in-person outdoor lunches, and other stuff like that which has started to open back up.
What are some of the significant issues that private equity clients are grappling with at this point in the pandemic?
Valuation continues to be a big issue. The key question remains whether past performance is indicative of future performance given continued uncertainty, and now we also have the looming election cycle. As a result of this, there continues to be a fair bit of dislocation in pricing expectations between buyers and sellers.
Also, I think PE investors were hoping that the pandemic would lead to an overall reset of pricing and valuation, but I'm not sure that has happened. In fact, businesses that are performing well in the current environment are still selling at very high multiples.
Are there any types of transactions you are working on regularly during the pandemic that were less popular when we weren't in a pandemic?
I've seen more minority investments, including from investors who are normally control investors. Also, while not new, it is much easier to consider and execute on add-on acquisitions in times like these, so activity there has remained relatively consistent.
You've been in practice during multiple major economic downturns. What is different about this one and how has it affected the market for deals?
The last downturn was driven by a financial crisis that then infected a number of other sectors of the economy. It took longer to take hold and it took a long time to recover. This downturn impacted the economy as a whole at the same time, causing extraordinarily rapid deceleration across the board.
However, we are already seeing a number of businesses bounce back quickly. And while the banks pumped the brakes at the outset of the pandemic, they are much better capitalized at this time and have been jumping back into financing deals more quickly. All that said, I still think there are a lot of unknown impacts yet to come and so I expect the rollercoaster ride to continue.
How has the influence of earn-outs, MAE clauses, contingencies, etc. impacted deals during the pandemic?
Earn-outs have been heavily discussed as a means of bridging valuation gaps, but I'm not sure they've actually been employed with greater regularity to-date. Deals for performing companies are getting done on terms similar to the pre-pandemic marketplace.
Regarding material adverse change provisions, as we have all seen, there's been a handful of deals that have busted because of MAE claims, or claims that sellers have taken extraordinary actions in breach of agreements, but those are all in the case of deals that signed up before the outbreak and were still pending when the pandemic hit. In deals signed up after the outbreak, buyers and sellers are being much more surgical in allocating these risks in purchase agreements.
Again, for well-performing companies up for sale, most of these risks are still being allocated to buyers.
How has your day-to-day work and personal life changed since the coronavirus outbreak?
I work from home three or four days a week. Our office is open on a completely voluntary basis, and I head in once or twice a week for a change of pace and to say hello to colleagues who are there. I'm pretty old school, so before this I was not accustomed to working from home. But, honestly, it hasn't been too hard to adjust.
On the personal front, I've got a great family and the quality time together has been a real silver lining. I consider myself very lucky.
What is your home office setup like? Was it a smooth transition to working from home, or were there any technical difficulties or mishaps on video calls, etc.?
My setup is pretty basic. I have a separate office with a dedicated phone line. The only new enhancement was a better monitor. Another silver lining has been going paperless. When I'm in the office, I kill a lot of trees. At home, I've become much better about this.
How do you usually unwind outside of work, and how has that changed in the wake of the coronavirus?
Aside from a lot more quality family time, I'm a bit of a workout fanatic — biking, swimming, hikes, etc. For me, the mental health benefits are just as significant as the physical. But in this environment, working out regularly has also helped me avoid the COVID-19 weight gain.
--Editing by Adam LoBelia.
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