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Coronavirus: private equity liquidity management is key to pandemic

In depth
This article is part of the dossier: Corona Chronicles: 20 April – 24 April

By David Whitehouse
Posted on Monday, 20 April 2020 15:02

REUTERS/Nyancho NwaNri/

Liquidity management will decide which private equity investors in Africa are able to take advantage of the new opportunities created by the coronavirus pandemic.

That’s the message from the transcript of a private webinar for members of the African Private Equity and Venture Capital Association (AVCA) on 8 April released to The Africa Report. The speakers and the institutions they represent were not identified in the transcript.

The industry needs to develop action plans to address falling revenues at the invested companies, argued Institution A. All levers on the cost side need to be used to cope with a slowing top line. These include a hiring freeze, cutting marketing spending and reconsidering receivables credits offered to companies. Institution B said that the focus needs to be on liquidity, rather than solvency.

The participants were discussing the results of an AVCA industry survey on the impact of COVID-19.

  • If the pandemic ended today, 33% said that it would take between one and three months for their business to return to normal.
  • A further 29% said they would be back to normal in less than a month.
  • Only 6% said the impact would last more than a year.
  • The survey drew on 49 responses.

Those results surprised Institution A.

  • The number of coronavirus cases is still much lower in Africa than in more developed economies, it noted.
  • Rather than looking at figures to date, the industry needs to assess the impact in a worst-case scenario and plan accordingly.
  • Institution C said it is encouraging its general partners to create crisis scenarios to understand their liquidity options, such as debt, reducing non-core operations and cost cuts.

Institution D expected the industry to take a hit on exits, but with some benefits for those making investments at lower prices. Fintech, which does not need social proximity, was seen as a beneficiary.

  • Fintech companies have successfully gone through several rounds of funding in the last few months and are well positioned for the short term, Institution D said.

Fundraising stifled

In the survey, hotel and leisure (90%) was cited by the fund managers as the sector that will be most affected.

  • Consumer goods and retail were seen as the next most affected sectors (35% and 29%).
  • The biggest challenge to the industry in the short to medium term was seen as the fundraising environment, cited by 67%, followed by asset valuations on 57%.
  • Overall, 67% said that they expected the COVID crisis to reduce expected returns.

Firms expect investments to take longer: 49% said that it will take between six and 12 months extra to fully deploy their capital. A further 16% said they would need more than an extra year. Almost half, 49%, said that the crisis would affect their fundraising timeline.

READ MORE: South Africa’s digital Bank Zero: on track to launch despite pandemic

The industries most likely emerge unscathed are telecoms and technology: no-one in the survey saw these as among the most affected sectors, while utilities and infrastructure scored just 2% and 6%.

The Bottom Line: Private equity investors in Africa need to plan liquidity scenarios for a prolonged crisis.

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