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Communication The Key To Managing Through Lockdowns For The Riverside Company

Lockdowns imposed by governments to flatten the adoption curve of Covid-19 have impacted PE funds and their portfolio companies on a huge scale. AlphaWeek’s Greg Winterton spoke to Karsten Langer, Managing Partner of Riverside Europe, to learn more about how Riverside is adapting to the ‘new normal’.

GW: What is Riverside doing now with regards to how it manages its portfolio companies that it did not do before?

KL: In a surprising way, the lockdowns have brought the Riverside team and our portfolio company teams even closer together than before. At the beginning of this crisis, Riverside provided to our portfolio companies several tools for managing through the crisis, such as templates for sanitary measures, cash forecasting, access to government support programs, as well as a framework of regular video meetings for crisis management. And we made sure that the best practices developed in each of our portfolio companies were shared with all the other companies, giving everyone not only useful tools, but also a sense of support from not having to face each crisis decision alone. At the global Riverside level, we set up a Virus Response Team to provide advance planning and best practice sharing for the firm and our portfolio companies.

GW: What is Riverside doing more of with regards to how it manages its portfolio companies compared to pre-Covid?

KL: Communicating! We are in closer contact with our portfolio companies, and there is certain operational and financial data which we collect more frequently than before. Where before, the main “pulse” was monthly, during this period it has been weekly or even more frequently when required. And of course, we have had many more video meetings with management teams, allowing for focused meetings without losing time on travel. As we emerge from the deepest part of the crisis, we are encouraging our teams to lift our eyes from the road immediately in front of us and consider the longer-term implications of the changes brought on by the pandemic. For example, we have seen an acceleration in many of our digitally enabled businesses during this time, leading to obvious discussions about how to maintain that faster momentum.

Karsten Langer
Riverside Europe's Karsten Langer

GW: What is the biggest lesson Riverside has learned from the recent, however temporary, ‘new normal’?

KL: I have been impressed with how well our teams – both at Riverside and in the portfolio companies - have risen to the challenges posed by Covid-19. Where four months ago we would have said there is absolutely nothing normal about all of us staying at home every day and only meeting via video, the new work environment brough on by the pandemic has felt surprisingly normal and efficient. Although we all long to get out and meet people in the flesh again, I have no doubt that this greater use of technology and reduction in travel will remain a greater part of our future for an extended period.

GW: Will PE firms like Riverside have to hold onto their portcos longer, given that buyers will value assets at a lower price, and if so, what is the impact of that on Riverside’s overall activity and portcos?

KL: It is too early to see the full impact of the pandemic on exits. Clearly, many exit processes that were ongoing in Q1 have been halted and may take up to a year – maybe longer for some – to resume. On the other hand, we have seen that businesses which proved to be “immune” to the virus’ effects can attract a premium in a fast process even in this market. I understand the first deals have been done where the buyer never visited the company due to travel restrictions, but instead had extensive video meetings.

GW: Some PE firms have, for a long time, had dedicated operations teams, like KKR with Capstone, for example. Will dedicated operations teams be employed more in the coming years so that PE firms can keep a closer eye on their portcos, and why?

KL: Riverside has had a dedicated operating team for almost fifteen years, today numbering over 50 experienced executives globally. This team has been critical in helping our portfolio companies through the pandemic. It’s not just – or even foremost – about “keeping an eye” on the portfolio companies. It’s really about leading and accelerating value creation by working closely with portfolio management teams. I am sure that the trend towards larger operating teams is set to continue.

GW: Switching gears to the actual portcos; a large portion of PE deal flow has become an auction, despite PE firms’ protestations that they offer ‘proprietary deal flow’. Will PE firms that have better supported their portcos during Covid be in a better position to use that as a differentiator to secure deals, even at a lower price or will this simply not resonate with sellers who just want the best price?

KL: Riverside frequently invests in founder-owned businesses. When these sellers are selecting their future owner, price is important, but the fit and quality of the PE house is just as important, if not more so. Very frequently, they are looking for a partner who can help them grow into new market, and who will be a good owner of their business. In this sense, being able to demonstrate close support of portfolio companies during the Covid-19 crisis is clearly an advantage.

GW: LPs will want to understand how the PE managers to which they allocate changed their approach to managing their portcos during the lockdowns so that they can better understand how these managers are minimising deal risk. Will ‘deal analysis’ be a stronger factor in how LPs decide with whom to place their money going forward, or is this a short-term event that will eventually dissipate?

KL: The Covid-19 pandemic provides an interesting example of an event with a totally disproportionate impact on some sectors and industries, a true black swan event. We chose to communicate early, openly and frequently with our LPs about how the portfolio was being impacted and what we were doing about it. Although it is tempting both for LPs and GPs to claim superior deal or manager selection when there is positive impact, and to blame the bad luck of the pandemic when it is negative, I think the real clue lies in understanding the speed and ways in which GPs adapted when faced with the pandemic.

GW: Will private equity emerge from the lockdowns with more stringent risk controls with regards to what it is willing to pay for companies and how much leverage to load onto their balance sheets and if so, how can PE justify that, when, before Covid-19, deal multiples were at an all-time high, seemingly disregarding the lessons learned from the Global Financial Crisis completely?

KL: There is clearly a new appreciation of “corona risk” and a desire on the part of buyers to lower entry multiples, while sellers are typically slower to accept a lower market. The bid-ask spread always widens in a crisis. But in this case, prices are sustained by record amounts of liquidity – including PE dry powder – looking for yield and record low interest rates likely to last several years. So, while markets and pricing will doubtless continue to adjust in the coming time, those who sit on the sidelines waiting to “buy low” might well miss out on good opportunities today.

Karsten Langer is Managing Partner of Riverside Europe

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