COVID-19 might have chilled some business deals and investments, but corporate attorneys are cautiously optimistic about the future for both startups and private equity deals as states gradually reopen.
However, this isn’t to say that there haven’t been industries or companies affected by the economic disturbances.
Mike Dill, corporate partner at Holland & Hart, discussed private equity and venture capital and how both are experiencing the activities, slightly differently in the markets.
“The general theme, as you would imagine, is that deal flow and activity has dropped,” Dill said, adding that a big drop occurred in May. Much of what was in the works and far along continued on and closed or finalized around mid-to-late April.
Julie Herzog, corporate attorney with Fortis Law Partners and business consultant, said it was hard to say if there was a large change since January. She said she saw a large decline in transactions from March to May and saw companies and venture capital buyers put deals on hold because of the “tremendous” uncertainty caused by COVID-19.
Many early stage deals did not reach closing or finalization in the private equity and venture capital spaces, Dill said. Dill had seen some deals fall apart right away and even a few near the finish line in March. Some seemed to dry up overnight due to firms not wanting to make capital calls on their investors.
“And even the deals that didn’t totally die, even a couple I had that were pretty far along, were pushed off to closing now,” Dill said, adding it was reaching a point where things were beginning to close. “Still some activity in that space, I don’t feel that dropped off quite as radically as the M&A space did.”
Many companies are continuing to get funding, Dill said, however, “I will tell you, that some deals I have worked on, those valuations dropped 25-30% or have lots of other contingencies tied to the valuations that could change at a later date.
In the venture capital space, companies that were really early-stage and not quite ready for true venture investors, many are having trouble raising money currently, Dill said.
Michael Weiner, partner and head of Denver’s corporate group at Dorsey & Whitney, said the situation is different than other downturns he has seen. He said he was practicing both during the “internet bust” and also in the financial crisis of 2008. “In both of those there was, of course, a lot less economic activity, and a lot more networking activity,” he said. “But in this one, we’re seeing a lot of economic activity and not a lot of networking activity.”
Dill agreed that the effects of COVID were not like a normal recession, but was similar due to the staggering number of job losses.
Herzog compared COVID-19’s disruption to certain areas of the economy to other large disrupting events, such as 9/11. She added that after 9/11 many industries, such as air travel, were affected immediately with shutdowns, and it was hard to say what the length of the impact on the timeline to recovery would be. She also felt that the current George Floyd protests would likely affect the timeline of economic reopening in the short term.
Dill said feedback from clients rested in not knowing how to price companies and what the long-term effect on buying those companies would be, especially in the private equity space.
Interestingly, Dill said two M&A deals had come back to life in the past week and looked like they would go ahead. This was also true with private equity, Dill said. “Even with the pandemic and everything going on, now obviously it’s been industry-specific to what they’re looking at.”
In the venture capital space, in a normal economic downturn, that would lag behind Dill said, but “nothing about this has been typical.”
In Weiner’s view, one pleasant surprise has been the amount of continued activity, particularly in private equity and venture capital throughout COVID and the money in those systems has continued to be put to work, Weiner said.
“It might be at a slightly lower valuation, or also a lower volume, but in the last two downturns that activity just fell through the floor,” Weiner said. “And the valuations were just terrible.”
The market is now picking back up in industries that were not adversely impacted by coronavirus, Herzog added. Retail, restaurants and other such industries are continuing to be on pause, and other industries, such as a non-alcoholic beer client, are not seeing any adverse impact in business or pursuing funds. She added that investors are still interested in those industries not seeing a downturn.
“If it’s a product that is sold in brick-and-mortar stores, then we’re seeing a big adverse impact or downturn because the impact on retail not being available,” she said.
On the flip side, if it is a product sold mostly online, Herzog said downturns aren’t being seen and, in some cases, an “uptick” is even present in business.
Despite the difference in sales, the coronavirus has not caused people to question the underlying business models that they invest in, Weiner said.
As a whole, investors, venture capitals and private equities are looking at a variety of companies which work currently and will work in the future. And while there may not be as many deals getting done, the ones that are being done at nice valuations, Weiner added.
Weiner’s main concerns lie in how startups would be affected long term by COVID, especially tech companies. One of his thoughts was about how, for say a small company looking to hire it’s fifth employee, it could be rather difficult without face-to-face interactions or connections.
Looking to the future, Dill said it was hard to know what to expect. The reports and feedback the firm had received, especially in the private equity M&A space, is that a “true lull” occurred where deal activity dropped off, and expected to see activity a little higher.
“But it will still stay lower than historical normal,” he said. “The general consensus I’ve been seeing through all the different articles and studies is that people expect it to be depressed for a period of time through the remainder of the year, and maybe not pick up again until 2021.”
The first quarter was barely affected by COVID-19, but when the data for the second quarter is available a clearer picture of the market can be made for public and private companies and firms, Dill said.
In the M&A world, many clients who had been preparing for sales or market their companies are still on hold, Herzog said. “And they’re waiting to see how the market picks back up.”
Weiner did note that every downturn has led to a “bevy” of startup activity. He noted that with something like 13 million people unemployed, many are looking for something to do. Often the hardest part of a startup is to quit the job you are working at, he noted. With mass unemployment and possibly no job it makes it easier for startups — be they restaurants or other businesses.
And in venture capital sphere, Weiner also felt that activity is going well compared to other downturns. He didn’t believe there would be a freeze on deals, but there would probably be a slowdown.
“I find this a very interesting time period. Obviously, the economy is down, but yet I don’t see the huge signs of unemployment, even though there’s a lot of unemployment,” Weiner said.
Looking to the future, it was tough to say how deal activity might pick up, Herzog said. In her practice, she was seeing clients build up funds to buy distressed deals, and she expected that market to pick up.
“My gut instinct is that the market will open back up within a few months, and stay strong,” she said citing positive reports on vaccines work. “Although, it is impossible to tell.”
— Avery Martinez