It’s an uncomfortable truth, but the impact of COVID means that many companies now seem attractive and viable investment opportunities.
Many of the investors we speak to expect to see more appealing valuations and more assets becoming available, as owner managers and parent companies work to de-risk, improve their balance sheets, or keep their businesses going. Bolt-on opportunities over the next 3-6 months seem particularly appealing, while the main market recovers.
But this will be against a backdrop of considerable political uncertainty – in terms of how the lockdown will be eased and what measures governments will take to boost their economics and improve their fiscal situation.
This period will be even more uncertain than the terrain GK navigated for clients after the global financial crisis. The investors that got a measure of these risks early on were able to able to benefit from investment opportunities that others avoided.
Policy changes are likely be extensive as we emerge from lockdown and over the longer term. New taxes and reduced public funding in many areas (as resources get reallocated to heath & social care) could harm the prospects for many businesses.
And it is still uncertain how and when many sections of the economy will get back to something resembling pre-COVID trading levels, given that it could be a long time before UK social distancing measures are significantly reduced (to the 1-1.5m levels that most countries use) for offices, bars and restaurants and leisure facilities.
Some policy changes could affect some sectors or business models more than others. For many FS or subscription-based businesses, for example, COVID-driven payment holidays might be extended. And gig economy based businesses could face new regulations in the light of widespread dissatisfaction with how companies and governments have treated gig economy workers.
So how can investors assess these risks and opportunities for potential bolt-ons? We have already written in detail about how businesses and investors can prepare to emerge from lockdown, but assessing the political risks and opportunities relating to bolt-on deals presents different challenges.
The bolt-ons that many investors find attractive are in niche, specialist areas, so they are more exposed to changes in regulation or taxation or public procurement than bigger businesses that can flex around more diverse offers.
This makes it all the more important to focus on the material risks and opportunities, clearly articulating what specific political risks could mean for each individual business.
We recommend that investors or companies assessing bolt-on opportunities undertake political due diligence focused on identifying any red flags and the scope to mitigate them. More comprehensive risk and opportunity assessments can be undertaken post-deal.
The same applies to ESG: time and other resource factors might limit the scope for comprehensive ESG DD, but this is no excuse for neglecting ESG – especially at a time when public and private buyers have heightened COVID-related concerns about key ESG issues like workplace and product health & safety and companies’ treatment of their workforces and vulnerable consumers.
We expect a lot more bolt-on activity in 2020 and can help investors and companies identify and mitigate the key risks early on.
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