Covid-19 – The Ultimate Test of Portfolio Construction in Private Equity

March 2020 started innocently enough with the potential impact of Covid-19 only starting to be contemplated, while in hindsight it will go down in infamy as the month that gave rise to one of the largest health related economic shocks in modern history.
The economic impact of government-imposed sanctions implemented to slow the spread of the disease was immediate and enduring:
  • More than 30% of large corporations reported revenue declines of at least 20%*
  • More than 35% of mid-market companies reported revenue declines of at least 20%*
  • More than 50% of small businesses reported revenue declines of at least 20%*
  • 37% of all business across Canada report they are losing money every day that they are open**
So, how is it possible to construct a durable private equity portfolio considering such challenges?  Sound fundamentals, of course, coupled with some good old-fashioned luck!  While no asset management firm predicted this event (despite Bill Gates’ warnings dating back to 2015), private equity investors can take certain steps to minimize the impact unforeseen economic shocks can have on their portfolios. Here are the lessons that we have learned through our navigation of these times:
Seek out Top Quality Management Teams and Ensure they are Invested
From the fund level through to portfolio company management, ensure the management teams are experienced, have managed through different economic cycles, and have put their own money where their mouth is. During challenging times like Covid-19, personal convictions and professional experience are tested to the fullest. Ensure that the groups entrusted with safeguarding your capital have their interests aligned with yours. Fund partners and management teams should have meaningful ownership interests at their respective levels. At Regimen, all three of our Managing Directors are significantly invested in the Fund and all of our portfolio company CEOs are invested in their respective companies.
The Fund benefited from swift, proactive management measures. Whether it was through working with our banking partners and landlords for temporary cash flow relief, implementing safety protocols to create safe workplaces for employees, customers and suppliers to mitigate business interruption, or by adapting to new selling and marketing approaches to compensate for in-person meetings, to name a few examples, Management commitment and alignment was evident.
Maintain a Long-term Outlook
So many of the stories recently published about investing have focused on getting rich quick, whether it be riding the trends (Bitcoin & Tesla), sourcing investment advice from social media platforms (GameStop), or taking outsized risks in hopes of hitting huge home runs (Archegos). Avoid the greedy impulse of ‘easy money’ and focus on buying companies that have a history of enduring economic shocks. At Regimen, our portfolio companies average almost 30 years in business, and we plan to hold onto them for decades more.
Diversify, Diversify, Diversify
While no one could have predicted the devastating impact Covid-19 has had on industries such as hospitality, travel & leisure and retail, private equity investors can take steps to ensure their investments are well diversified across industry and geography. While funds with industry specific mandates may be potentially easier to implement and understand, they can also suffer outsized negative revenue impacts when disruptive shocks roll through the economy. Covid-19 related lockdowns in high population centres (Toronto, New York, Paris) have had disproportionately negative impact on businesses operating in these areas. At Regimen, we continue to make concerted efforts to ensure that each subsequent acquisition is un-correlated to our existing portfolio companies.
Utilize a Conservative Approach to Leverage
Funds that acquire companies at aggressive valuations and seek to manufacture returns based on high financial leverage can quickly find themselves off-side of their banking agreements when an event such as Covid-19 disrupts their portfolio companies’ cash flow. Funds that instead look to drive value through fundamental business growth and use credit conservatively, will find a friend in the banks during these disruptive times and may even be able to strategically expand their portfolios utilizing this support. At Regimen, we use comparatively lower leverage from our assessment of other private equity funds in the market place.
A Little Bit of Luck
As they say, you need to be good to be lucky and lucky to be good. Regimen’s focus on only acquiring companies that sold their products and services to other companies (commonly referred to as “business to business” or “B2B”) resulted in the portfolio avoiding the severe revenue shocks experienced by many companies who sold products and services directly to consumers, especially those relying on retail locations. Our portfolio companies were thankfully all considered ‘essential service’ businesses and were allowed to continue to operate, albeit under strict Covid-19 protocols.
So, while no one can predict the future, every sophisticated investor can take control of the quality of their investments by contemplating the above guidelines when making private equity investment decisions.
*Source: Statistics Canada and the Canadian Chamber of Commerce Canadian Survey on Business Conditions comparing Q1 2020/Q1 2019
** Canadian Federation of Independent Business, President Don Kelly, October 2020
To learn more about Regimen’s approach to portfolio construction, please contact Kelly Burke, Vice President, Business Development at or Cooper Seeman, Managing Director at