Portugal: Sharing risk to face an outbreak
Following the drastic measures taken by the government to fight the COVID-19 pandemic, everyone is rapidly adjusting to what, for now, is the new normal of restricted movement, remote working and temporary business closures. Countless entrepreneurs and business owners no doubt feel like the rug has been whipped from beneath their feet, and many carefully constructed business plans to create shareholder value have quickly been replaced with emergency actions to manage short term liquidity.
The most immediate and common impact of COVID-19 for many will be a significant but temporary drop in sales, potentially resulting in material cash flow issues.
The well-publicised government schemes are summarised below, however there are significant gaps – especially for SMEs. For short term liquidity requirements and beyond, owners may want to consider alternatives, including equity investment.
At Clearwater we have a deep knowledge of private equity (PE) and in 2019 completed 53 deals with over 30 different funds. We know the appropriate investors to engage with to find the right solutions for your business.
Government Measures - Recap
The Government has moved with speed to announce a raft of measures to minimise the impact of COVID-19 on businesses including:
- Simplified layoff – extraordinary support for the maintenance of employment
- Moratorium scheme granted by credit institutions
- New credit lines guaranteed by the state
- Extension of payment deadlines of tax and social security obligations
- Accelerated payment of incentives under Portugal 2020
These measures are welcome but not without limitation. For example, the layoff access is only available to companies that shutdown (totally or partially) their activity or that suffered a drop of more than 40% in their revenues. Besides, it does not cover the total monthly remuneration of the employee.
Most of the tax and social security obligations can only be deferred in two thirds during 3 or 6 months, which seems insufficient. In addition, the amount available in this credit lines are set up below the needs felt by the companies and impose a maximum limit per company on the access to this financing.
Companies will face significant challenges accessing the solutions presented above, especially related to credit lines guaranteed by the state. While debt remains a cheaper form of funding for businesses there are considerable advantages to securing alternative sources of capital such as equity investment.
While the immediate attention of PE and other institutional investors will be on their portfolio companies, the fact remains there are record levels of funding to deploy and through our constant conversations with investors we know they will continue to invest and back strong management teams.
Selling a stake in your business to an equity partner is a big decision however, and some points to consider would be:
- Speed – equity investors will typically move quicker than a bank (who will be inundated with loan applications currently)
- Cashflow – equity investment is normally in long term instruments that do not add pressure to cashflows of the business
- Support – access to experienced investment professionals and their networks
- Expertise – Non-Exec Directors can add significant value
- Further funding – investors are generally keen to continue to back good management teams
We have strong relationships with leading equity providers who specialise in providing flexible funding solutions to strengthen balance sheets, provide development / replacement capital or accelerate growth.
Strengthen For Growth
For businesses who are able to weather the immediate storm but deplete their cash reserves which in turn sets back their growth plans, it may be appropriate to consider selling a stake to an equity investor who specialises in providing both capital and expertise to drive future growth. This expertise can encompass anything from strategic input at board meetings, to acquisition support and sharing operational best practice.
Access to such growth capital could ensure businesses are ideally placed, when the time is right, to capitalise on organic growth opportunities or have the financial firepower to pursue an active M&A strategy ahead of their competitors.
Perhaps counterintuitively, the enforced lock down period could present an attractive opportunity for business owners to consider strategy, and ensure their companies are well capitalised and resourced to deliver the next stage of growth.
With a rich and respected heritage in private equity, Clearwater International remain in regular dialogue with investors with whom we have built up trusted and lasting relationships. Ongoing conversations allow us to stay tuned into the very latest.