Private Equity CFOs and the COVID-19 Downturn

by: Atta Tarki  Ken Kanara & Gustav Brown


Key Highlights: 

ECA Partners today announced survey results of over 100 CFOs of Private Equity (PE) owned companies on how the COVID-19 downturn is impacting their financial priorities. The results demonstrate the severity of the impact on company finances to date, while also showing that respondents do not expect a quick rebound. At the same time, the results also suggest that the worst may be over for PE-backed companies.  


Selected findings include: 

  • Cuts to spending for 2020 have been deep: 61% of PE-backed companies surveyed have already cut spending by more than 10%, while 17% have cut spending by more than 30% 
  • Most CFOs expect additional spending cuts for 2020 and 2021, but expect those cuts to be relatively small (under 10% of pre-COVID spend) 
  • Half of CFOs surveyed have not reduced salaries; among those who have, most expect salaries to return to pre-COVID levels by the end of this year 



ECA Partners recently conducted a survey of more than 100 CFOs to assess how the COVID-19 downturn has and continues to affect financial priorities and allocation decisions at PE-backed companies.   


Private equity in the US accounts for more than $1 trillion in value and employs approximately 9 million Americans, with more $600m in wages earned in 2018. It has been one of the main drivers – and beneficiaries – of economic expansion since 2009. Like other sectors of the economy, however, PE-owned companies have been deeply affected by domestic closures and other restrictions enacted in response to the COVID-19 outbreak, as well as from the disruptions to the global supply chain, ongoing declines in global trade, fast-rising unemployment and general loss of consumer confidence that define the current economic climate.  


Our survey posed a series of questions to CFOs at PE-backed companies on the following themes: (1) how the COVID-19 emergency has impacted their financial priorities; (2) how they project COVID-19 to impact future spending allocation for 2020 and 2021; and (3) when they expect company restore full pay for employeesIt is comprised of more than 100 CFOs from PE-backed companies, ranging from small (less than $50m in recurring revenues) to very large (more than $10b in recurring revenues). 


Survey responses suggest that PE-backed companies have been hit hard by the COVID-19 downturn, and CFOs expect more cuts to spending for 2020 and 2021. At the same time, most CFO respondents appear to believe the worst is over.  


1. Spending Cuts

We began by asking PE executives whether they have reduced spending as a result of the COVID-19 downturn. We then asked the 86% of respondents who have reduced spending to compare (a) cost reductions budgeted for 2020 to (b) additional spending cuts they expect to make for 2020. The majority of respondents (61%) have cut spending by more than 10%, with a plurality (44%) cutting spending by 10-29%. However, only 30% of respondents expect to make additional cuts of more than 10% for 2020.



We then asked respondents to make the same comparison for 2021. Only 36% of respondents reported cutting more than 10% of spending from their 2021 budgets, and only 21% expect to make additional cuts of more than 10%. Less than 5% of CFOs have or expect to make cuts of more than 30% for 2021.  



Taken together, these findings suggest that while the COVID-19 downturn has deeply affected PE-owned companies, their CFOs believe the worst is over and that the situation has stabilized to a significant degree.  


2. Allocation

The second set of questions focus on how the evolving COVID-19 situation continues to impact CFO activities and fund allocations. Compared with the previous 30 days, 66% of CFOs expect to spend more time on cash management – a finding that underscores the depth of the downturn’s impact on PE-owned companies. Similarly, 59% expect to spend more time increasing cash flow.  By contrast, CFOs are split on product launches and/or expansion of existing products – 33% expect to spend less time on this, while 34% expect to spend more.  



In terms of spending allocation, 71% of CFOs expect to allocate less for discretionary spending, while 51% expect to spend less on hiring. Strikingly, though, only 22% of respondents expect to lower salaries over the next 30 days. 



3. Employee Pay

Finally, we asked respondents to predict when their companies will return to full pay for all employees. A majority of respondents reported that they have not cut salaries. Among those who have, the largest proportion believes salaries will return to normal levels by Q3 2020. Nearly all believe this will occur by Q2 2021 at the latest.  



4. Demographics

The survey offers a snapshot of private equity in the United States. Respondents hail from companies with less than $25m in annual recurring revenues (21%), $25-99m in annual recurring revenues (43%), $100-999m in annual recurring revenues (34%) and more than $1b in annual recurring revenues (2%). In terms of workforce size, respondents come from companies with fewer than 50 employees (8%), 50-200 employees (45%), 201-500 employees (24%), 501-1000 employees (7%) and more than 1,000 employees (16%).  


Among respondents, 71% come from businesses organized around a business-to-business (B2B) transaction model, 21% from businesses organized around a business-to-consumer (B2C) transaction model and 8% from companies that do not fit neatly into either category.  




These findings demonstrate how deeply the COVID-19 downturn has impacted PE-owned companies and their spending priorities. Equally, though, it suggests that the worst may be over. Most CFOs do not expect additional large spending cuts for 2020 or 2021.  


There are reasons for guarded optimism. To begin, most CFOs surveyed have not reduced salaries for existing employees; among those who have, most believe salaries will return to normal before the end of 2020. And CFOs of PE-backed companies are not simply in a defensive position. Rather, they continue to work on growth initiatives, such as strategic acquisitions, new product launches or expanding existing products. While no sector of the economy is likely to return to a pre-COVID state until there is a vaccine or effective therapeutics for treating the virus, our survey suggests that the PE sector may begin recovering more quickly than the economy as a whole.   



Atta Tarki is the founder and CEO of ECA and the author of Evidence-Based Recruiting (McGraw Hill, February 2020).




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