There is no denying that the coronavirus crisis is testing the world to its limits. The private debt sector is no different, with some investees taking a direct hit. Many businesses have suffered huge losses, sometimes closing their doors permanently, laying off staff and seeing revenues decline or disappear completely. For some, demand has outstripped supply, as supply chains have broken down, and staff shortages have impacted suppliers’ ability to manufacture and deliver goods.
But there is a glimmer of hope. Many of our clients, including hedge funds and private equity firms in Europe and the US, have been very well prepared, with operating models and businesses continuity plans that have helped them enormously so far, even though they couldn’t have predicted the scale and nature of the crisis.
While some have compared the effects of the coronavirus to the 2008 financial crisis, I believe that there are some stark differences which make it hard to compare, but that the current situation isn’t as much of a threat as the earlier crisis. There certainly seems to be a lot more money available, especially in the private equity and private debt sector, and a willingness to invest that wasn’t there in the 2008 recession. In fact, I foresee some permanent changes brought about by the crisis, which could in fact be very positive.
The way we do business will change
Businesses that can enable employees to work from home have been forced to put measures in place to allow that to happen. While many of RFA’s clients already had remote working strategies in place, moving from around 30 percent of the workforce operating remotely to 100 percent has been a challenge.
We have supported them by rapidly scaling up their VPN solutions or adding additional users to their remote desktop solutions. We have also taken steps to secure users in their own homes, giving advice around securing home WiFi networks, best practice for using corporate devices, encouraging the use of multi-factor authentication and single sign on solutions. Cyber criminals are taking full advantage of the chaos and confusion by creating malicious campaigns using coronavirus content in a bid to trick unsuspecting and disoriented users.
The use of remote collaboration tools like Microsoft Teams, SharePoint, Zoom and Slack has increased, as firms are not only running virtual meetings for staff and teammates, but are conducting meetings with service providers and investors, and even holding interviews using online conferencing.
As staff get used to working remotely and businesses become more trusting, realising it is a viable way to work, the trend for remote working will accelerate and could endure way beyond the coronavirus period.
In the longer term, if the proximity of people’s homes to their job becomes less important, the appeal of city or commuter belt living declines, the population becomes more geographically spread and businesses may decide to reduce their investments in office space in premium locations. Likewise, demand for flexible, shared workspaces may decline in favour of home working.
Digitally mature businesses still reign
There is no doubt that some popular private debt sectors will be hard hit. Commercial real estate is struggling as offices, retailers, hotels and leisure facilities close their doors. The short-term lack of revenue might finish some travel and tourism businesses off, but Airbnb managed to raise $1 billion in debt and equity via private equity firms, testament to its robust digital operating model and resilience.
In the same way that the virus has accelerated the remote working trend, it has cemented the already strong demand for online shopping.
Naturally the healthcare sector is seeing strong demand for investment, especially the digital healthcare sector, with telemedicine tools such as GP online services, health trackers, monitors and sensors and digital solutions to help manage long-term conditions. Tools that track the health of the population are being used, with data analytics tools that can model the way pandemics like this one could develop and spread.
Overall, the technology sector is attracting private debt investors and, given its role in keeping the economy going at the moment, I see this continuing.
ESG investments will be more popular
With less factories in operation, fewer cars on the road and flights and rail travel drastically reduced, the coronavirus has already had a positive impact on the environment, allowing us to see what is possible in a relatively short period of time.
Investor interest in renewable energy sources could last beyond the crisis, given the recent focus on ESG by regulators and governments and the test environment that we have found ourselves in.
The main learning from the coronavirus, relating to ESG issues, are that climate change can be tackled. While the circumstances are extreme, investors and investees can see that it can be done. Companies that revert to operations that heavily rely on fossil fuels and consuming vast amounts of energy could well be regarded in a poor light. Conversely, those that focus on renewable strategies may be viewed more favourably.
The pandemic has shone a light on those companies that don’t provide employees with a decent living wage and safe working conditions, and these factors could take on greater importance for ESG investments. When I look at the online retail sector and businesses which appear to have prioritised profit over employee safety and well-being, I believe they will not come out of this unscathed.
Conversely those companies that have supported their employees with extra benefits, pay when not working, information and support, and generally acted in a socially responsible way will be remembered. We have worked tirelessly for our clients, ensuring that their transition to remote working has been as seamless as possible, and we have put measures in place to ensure our own staff are safe, supported, informed and feel secure in their jobs.
As mentioned, the transition to online collaboration tools can impact the environment too, as demand for carbon-heavy activities falls. Flying or driving long distances for meetings will not be as popular post-pandemic.
I have read that financially, ESG ETFs have seen better fund flows and lower outflows than other funds, so it seems like investors do have greater faith in them.
Something RFA is passionate about is operational risk management, and following the crisis, businesses will be expected to provide more information on how they are measuring and managing risk than ever before. Supporting firms with investor due diligence questionnaires already consumed a lot of our time, but I believe investors will scrutinise risk management policies in even greater depth, post-pandemic.
I see this as a turning point for many businesses and anticipate investor selection becoming more rigorous. Firms will need to demonstrate that they are resilient, have a strong supply chain, support their staff, are ESG aware and can still drive strong returns.
George Ralph is a managing director at RFA, a technology advisor to the investment management industry