Credit managers and limited partners, are taking a cautious approach to opportunities, but new investments are not completely off the cards, panelists at a Carmo Companies' Global Private Equity Web Meeting, which ran April 27-29, said.

There is limited information about the extent to which the coronavirus pandemic and the associated lockdown provisions will affect businesses, and the full impact of the crisis is not expected until second-quarter results come out in July and August.

"There's going to be a long period here without much really great information unless you are directly investing into these companies and getting their monthlies," James Danforth, director of alternative investments at San Francisco-based multi-family office True Capital Management LLC. "From my LP standpoint, we're a little bit flying blind here. So yes, we're kind of looking to be opportunistic, but it's going to be tough here."

Randy Schwimmer, head of senior lending and capital markets for Churchill Asset Management LLC, an affiliate of Nuveen that provides finance to private equity-backed companies and has a fund of funds program, said the firm has a handful of opportunities in the pipeline.

Churchill Asset Management has been predicting "this recession since the last one" and has invested in defensive businesses rather than cyclical ones in sectors such as healthcare, business services and technology, which he believes will pay off for the firm. But, he added, "we didn't realize, and I don't think anybody realized, that that's not enough; that you also have to make sure that all your companies have plenty of liquidity. You also have to make sure that your private equity firm that is backing the business has plenty of liquidity and that they have the wherewithal and the interest to actually support the business because this has introduced to the equation some commercial variables that no one anticipated."

Businesses with lower leverage and higher spreads, for example, will be better prepared. Churchill Asset Management has never done a deal without a "full blown covenant, which turned out to be a smart move."

"We tend to want significant equity capital below us … on average our portfolio companies have 55% of equity below them. So I think we did all the right things. And now the question is execution. So can the sponsors figure out a way of getting from this point to — is it June 30, September 30? We don't know, but to get through the next six months," Schwimmer said.

Opportunity minded

Brett Hickey, CEO of Star Mountain Capital LLC, which provides loans to businesses and invests in secondaries, said deals the firm has closed in the past month have been made exclusively with its existing portfolio companies, "part luck and hopefully part of strategy," in companies with "tremendous opportunity" such as videoconferencing and telehealth.

The firm has "a bunch of deals that are in the hopper that we're cautiously optimistic about," but even if companies have "absolutely pristine" reporting, Hickey said the firm wants to see how things go, at least until the end of April, so the firm will need another two weeks minimum to make decisions.

Opportunities for new assets where the firm wants to meet in person before they underwrite deals are on hold until staff are allowed to travel, Hickey said. "We've got a bunch of things very close with legal agreements almost done and so forth that will be pending a few key last items, including verification of financial information, certain in person on-site type of things," he said, adding he expects deal flow to pick up in the second half of 2020.

In the run up to the coronavirus pandemic, private equity investors were aggressive in their bid to do deals with managers adopting a fear of missing out mentality, Colin Raws, director of business development at debt and structured equity investor Boathouse Capital, which is focused on growth deals, said. "Missing a deal makes you look as bad as doing the wrong deal, right?"

In the wake of the crisis, this mentality has been turned on its head as private equity firms sit on the sidelines until uncertainty subsides, creating opportunities for investors like Boathouse. "With that void, there's still going to be a need for somebody to step into those shoes. I mean, we talk about liquidity, and there's definitely still plenty of capital sitting on the sidelines, but it is that opportunity for mezzanine to come in and fill that void and still be smart about leverage and covenants and other things," he added.