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Six Key Takeaways on COVID-19’s Impact on Mergers & Acquisitions

In true black swan fashion, COVID-19 has surprisingly swiftly battered world economies and brought domestic and international businesses to their knees. To get first-hand insights on its impact on mergers and acquisitions (M&A), in April 2020, SourceScrub surveyed Private Equity, Venture Capital and Search Funds on how the Coronavirus pandemic has changed their operations, investment strategy, and outlook.

Here are six key takeaways from our survey:

Portfolio Protection and Management Is Now Priority # 1

Private equity and venture capital firms have seen a major shift in focus – away from new deal origination and execution, to managing the very real existential and competitive threats that their portfolio companies face due to this crisis. Surveyed firms reported spending 39% of their “time and energy” on Portfolio Management (as of April 2020), significantly more than on other activities.

Given Covid-19, what percent would you estimate to be your firm's time and energy allocation across the 5 activites?

With work from home (WFH) the new norm, PE and VC firms are also spending more time, than before, on team management, remote collaboration and productivity.

Expect Sharp Jump in Investment Opportunities

The COVID-19 crisis has induced an almost Darwinian natural selection within the corporate world. A small percentage of firms will undoubtedly fold or go bankrupt. Many will need some form of life-support to survive (think partnerships and capital infusion). The fittest will not only survive but seek capital to gain market share in a cleaned-up, less crowded competitive landscape.

Consequently, survey respondents are a lot more bullish about investment opportunities in this down market. Almost a third (32%) expect to get more or significantly more aggressive in how they deploy capital going forward.

Private Equity Venture Capitalists Funds Deployed Covid-19

Lots of Dry Powder Could Exacerbate Deal Competition

Private equity firms collectively hold a record $1.5 trillion in undeployed cash “dry powder” that they are eager to put to work. With 71% of respondents yet to deploy even half of their funds, we expect investors will get more aggressive and competitive to put funds to work.

Private Equity Venture Capital Percent of Funds Deployed Covid-19

Many Firms Will Change Their Investment Thesis

A majority (56%) of SourceScrub’s survey respondents believe the Coronavirus crisis is a game changer for their investment theses. 13% have already changed their investment thesis and are in the process of implementing a new approach. 32% are working on new investment strategies for a post-Coronavirus world. 11% are taking a “wait and see” approach on how this crisis plays out.

Private Equity venture capital investment thesis covid-19 coronavirus

On the flip side, 44% believe this crisis too shall pass, with virtually no impact on their investing approach.

Most PE Investments Expected in Q3 and Q4 2020

With COVID-19’s outcome still uncertain, most of SourceScrub’s survey respondents expect to make their investments in Q3 and Q4 2020, when there is, hopefully, more clarity on where the economy is headed.

Private equity venture capital funds deployed coronavirus covid-19 q3

However, 13% of survey respondents expect to act sooner and make investments in Q2 2020, while 14% plan to wait until 2021.

After COVID-19 Fears Subside, Deal Sourcing and Execution Will Again Become Priority # 1

After the Coronavirus crisis subsides, Private Equity and Venture Capital firms expect to scale back time spent on portfolio management, and gas-up new deal sourcing and execution. They also plan to halve the time spent on team management and work-from-home, down from 8% to 4%.

private equity venture capital covid-19 time allocation portfolio management deal sourcing

In summary, the convergence of $1.5 trillion in uninvested capital and COVID-19’s massive economic disruption should move Private Equity and Venture Capital deal flow into overdrive in Q3 and Q4 2020. Moreover, beyond temporary workflow changes, the Coronavirus crisis is expected to significantly change when, how and where Private Equity and Venture Capital firms deploy their capital going forward.