How COVID-19 is transforming the PE operating model

After the economy recovered from the Great Financial Crisis of 2008, economic activity and growth were steady and predictable. As a result, private equity-owned companies optimized their operating models for efficiency, anticipating the next economic cycle would a more modest recession. No one, publicly traded corporates or PE-owned companies, was prepared for the sudden and complete secession of economic activity caused by COVID-19.

However, PE investors reacted very quickly, understanding the severity of the crisis and mobilizing to increase liquidity across the portfolio. While a few sectors were spared from the sudden economic collapse, a wide spectrum of both impacts and actions can be observed across the vast majority of the US economy.

We believe that the COVID-19 induced economic collapse will greatly accelerate several ongoing trends:

• Global supply chains will fragment as companies look for more resiliency
• Continued reconsideration of extent of reliance on China compared to lower-cost and lower-profile countries 
• Automation will be more widely deployed in a range of activities and sub-functions
• Back-office functions will be increasingly outsourced 
• The value of office real estate will diminish due to large-scale adoption of remote ways of working 
• Assessing the impact “black swan” events will become the norm in scenario planning

The post-great recession period of stable, predictable growth enabled companies to optimize and achieve greater efficiencies. The big question for the next decade will be: how much efficiency must be sacrificed to achieve greater resiliency that the post-COVID-19 world requires? And how will this resiliency affect the returns PE firms can generate?

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