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PE firms must be prepared to face challenges across each fund vintage

Private equity firms must be prepared to face challenges "every 10 years" and across every fund vintage, Gilles Collombin, partner at mid-market firm Charterhouse Capital Partners LLP told listeners at the virtual British Pvt. Equity and Venture Capital Association Ltd summit Oct. 7.

The global financial crisis was "painful for everybody," and the asset class began changing and adding value creation teams, moving away from the focus on the "L of leveraged buyout, a lot of leverage," he said.

The COVID-19 crisis has been "much more operational than the previous one, which was much more financial," and businesses backed by private equity firms with these new teams in place have had access to capital and skills, Collombin said.

Those few firms that have not focused on the operational aspects of their portfolio companies, and are "still very hands-off and putting [in] a lot of leverage," may find it more difficult to help their portfolio companies through the crisis, Collombin added.

'Nimble' with sector approach

On whether the pandemic has demonstrated the benefits of being a generalist fund manager, founding partner and Chief Investment Officer at mid-market manager Livingbridge Shani Zindel said private equity managers are "known to be nimble" and firms are "good at taking up opportunities in the areas they are familiar with," Zindel added. "I don't believe — and I never have — that there is one winner in generalist versus sector specific. I think people figure out how to do the best they can within the areas that they have the most experience."

At this stage, she would be "very surprised" if anyone is considering changing their sector strategies, she added. "Even if you are investing solely in a sector that's been heavily affected by COVID, you need a bit of time to see how that is going to wash through. And most sectors are pretty broad."

Growth firm FPE Capital LLP focuses on investments in technology, which is in demand due to remote working requirements. But even within this sector, there's a broad level of exposure when looking at the underlying customer base, managing partner Henry Sallitt said.

"Just because it's a software business, it doesn't necessarily mean that it's protected from what's going on out there right now," Sallitt said, adding that it is looking at whether its portfolio companies may be exposed to customers that are smaller businesses, which could face a difficult period going forward.

Not a desk job

Private equity firms will introduce efficiencies post-COVID-19, but panelists said the business is "not a desk job" and teams work better when they can work together and travel to meet stakeholders.

When the outbreak began, FPE Capital's portfolio companies were much better at working remotely than the firm was. "We were perhaps a bit of a laggard on that, and they were much more familiar with using video conferencing, some of the instant messaging platforms, Slack groups, et cetera," Sallitt said.

The firm is now communicating "much more seamlessly" with its portfolio companies than it did before the outbreak, and Sallitt expects "a lot of that to last," but he added there is no substitute for a physical meeting. The key question for the firm, he said, is what the balance will be between visiting companies and days in the office compared with the "kind of more efficient medium of communicating on these types of platforms" in the longer term.

The private equity industry has digitalized in recent years, using software for pipeline and customer relationship management, for example, which has improved efficiency, Collombin said. But digitalization is a lot about speed, he added, and Charterhouse does "a few deals a year," and gets to know companies and management teams across about two years. "We were [using software], we just do it better now — no doubt. Will it change a lot? Not really. I think if you take sourcing and value creation, we know that it will not change anything." Collombin said.

Livingbridge learned there is a series of workstreams that can be done efficiently remotely, Zindel said, which saves time and travel, particularly with international deals, but the firm operates "much better" when employees are together. "You should be out and about, you should be originating and meeting as many companies as possible, doing deals, and once you've done those deals, you should be spending time with your businesses and looking for the next deal. And so I don't believe that's going to change."