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PE Firms Adjust to Unprecedented Conditions

August 26, 2021

How are labor shortages, disrupted supply chains and climate change impacting the private equity industry as of late? Find out here.

The first half of 2021 saw a jump in private equity (PE) deal volume compared with the first half of 2020. Historically low interest rates combined with surges in fundraising and significant dry powder (cash reserves) helped to spur activity. As concerns mount about potential changes in capital gains taxes, deal activity is likely to continue at a healthy pace. But many transactions are taking on a new flavor in light of some lingering pandemic-related problems and alarming warning signs about the future.

Labor Shortages

Many employers are finding it difficult to return their workforces to pre-pandemic levels, even when they offer higher wages. Portfolio companies may feel the pinch as price sensitivity is increasingly high, despite rising consumer demand across many sectors.

Some portfolio companies have responded by investing more in employee health and safety, with the goal of retaining their existing workers. This might mean continuing COVID protocols, such as mandating masks, providing other personal protective equipment and maintaining social distancing, where possible.

PE-backed companies also are deploying technology to fill in some of the labor gaps. Companies with primarily white-collar, formerly office-based workforces have invested in collaborative work and communication software, cloud computing and similar solutions. But blue-collar companies are benefiting from technology, too. For example, construction firms that are short on manpower are using drones for inspections and workflow tools that boost the productivity of their smaller staffs.

Disrupted Supply Chains

Labor shortages are among the drivers behind the supply chain disruptions that continue to plague many portfolio companies. Approaches to manage critical supply shortages have varied.

On one end of the spectrum, some companies have channeled customers to the products they have on-hand or have the capacity to produce in a timely and cost-effective manner. They might turn away specialty orders and postpone their own R&D projects and trials.

Other companies are turning to artificial intelligence to help predict demand and enhance planning. And companies across the spectrum are researching additional supply options to build in resilience going forward.

It’s important that PE firms reconfiguring their portfolio companies’ supply chains bear in mind the possible tax implications. Relocating an element of a supply chain could trigger higher taxes or, conversely, generate tax incentives for on- or near-shoring.

Focus on Climate Change and ESG Issues

With temperatures soaring, wildfires blazing across the western United States and catastrophic floods hitting Europe, climate change is making itself a formidable factor in decision making. Extreme climate developments could attack some of the same vulnerabilities that were revealed by the pandemic, with devastating repercussions.

Not surprisingly, limited partners are raising their expectations for PE firms when it comes to planning for and mitigating the effects of climate change. Firms are developing formal environmental, social and governance (ESG) policies that account for the impact of climate change, among other issues, and require similar policies from their portfolio companies. Some also are looking for talent with experience in ESG matters to identify opportunities for new acquisitions and existing companies.

Consideration of the potential impact of climate change on a target company should be integrated into the process from the initial transaction screening through to exit. For example, comprehensive risk assessments should evaluate how climate change could affect access to raw materials, shift consumer preferences, undermine political stability, and prompt new regulations and prohibitions.

We Can Help

Tumultuous times demand strong partners, whether pursuing deals, staffing PE firms and portfolio companies, or repositioning for new market conditions. Contact our Private Equity group for assistance in these areas and others.

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