- COVID-19 crisis is testing the resiliency of private equity and social impact investors as cash flow and funding dry up.
- Emergency measures eyed to keep portfolio companies afloat.
- Immigrant and emerging market funds may weather pandemic better than those focused on traditional impact sectors.
Business worldwide is as close to a standstill as anyone will likely ever see — and private equity and social impact firms are eyeing steps to keep their investments afloat.
“Serious economic carnage” lies ahead for companies funded by private equity, PitchBook analyst Dylan Cox wrote in a note this week. “Most GPs are focused on keeping current portfolio companies afloat, rather than sourcing new opportunities.”
Impact firms are looking at how to keep their portfolio companies running, and are eyeing debt restructuring, new sources of funding and a host of emergency measures. Impact managers are in a similar position to traditional fund managers, according to Lisa Willems, managing director of AlphaMundi Group Ltd, an impact investing group that invests in social business in East Africa and Latin America.
“Across the globe, small businesses and vulnerable populations, like the rural poor served by AlphaMundi’s portfolio companies, are bearing the brunt of the crisis and new sources of funding, likely coupled with debt restructuring, will be necessary to pull many companies through the coming months,” she told Karma.
The group is also exploring raising grant dollars through its nonprofit arm, redirecting some cash reserves for emergency funding, and coordinating with other organizations to provide sector-level support.
In the midst of these challenges, Willems also sees a brighter side for impact investing, because of its experience implementing blended finance solutions. Many “impact first” investors and development institutions are marshaling so-called concessionary loans, which offer generous pay-back terms, longer grace periods and lower interest rates.
“Yet timing is critical as a matter of months can mean insolvency for many small enterprises and, in extreme cases, the potential collapse of entire industries (such as off-grid solar in Africa),” Willems added.
Fortunately, funds like AlphaMundi have a few extra weeks to maneuver during the outbreak, because some emerging markets ventures are not yet facing the acute day-to-day crisis in more established markets.
Unshackled Ventures, the early-stage venture capital fund focused on investing in immigrant entrepreneurs in the U.S., said this week that it would invest in 20 to 30 more entrepreneurial companies at the idea stage, adding to its stable of 38.
“Over the next 12 to 18 months, we will make 20 to 30 more Day 0 investments of $200-$300K into visionary immigrant founders and/or teams who are ready to tackle hard problems — the harder the problem, the more we want to see it,” the company wrote in its announcement.
Company founding partner Manan Mehta told Karma that the immigrant entrepreneurs under the Unshackled umbrella have weathered the early storm of COVID-19 and are ready to move forward.
“As immigrants, a lot of these people have faced adversity in their lives. They are strong,” added Mehta. Mehta believes that early-stage funds that have competent people, engage in a solid process at the evaluation stage and have sound underlying performance measurements will survive.
Emergency funding can come from sources like Open Road Alliance, a philanthropic entity that provides capital for nonprofits and social enterprises. Among the stopgap solutions offered are raising grant dollars for entrepreneurs to recover, setting up an in-house emergency bridge loan fund for the company’s existing portfolio and pooling and managing emergency relief funds for small businesses.
In the recent PitchBook note on how COVID-19 is impacting the private equity market, the authors wrote that they expect fundraising, already slowed, to continue for another two quarters, and they also believe that general partnerships will hold on to portfolio companies rather than sell them off at discount prices. Retaining such companies in times of stress is similar to what happened during the global financial crisis.
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