With R900 million available for investment in new opportunities including healthcare, at Agile Capital we believe that private equity partners have a key role to play during South Africa’s potentially catastrophic economic future. Even those few enterprises which entered the lockdown with confidence that they could survive for a month or two are likely stretched to their limits.
There are certain levers that can be pulled to ensure the sustainability of businesses with good fundamentals. Private equity partners have a key role to play in the long-term viability of their investments. Ultimately, as responsible owners of companies, we believe that equity partners are well-positioned to practically demonstrate a partnership approach.
There is no silver bullet for businesses right now, but Agile Capital is advising our own portfolio companies to focus on four key areas of defense to survive the immediate crisis and give themselves the best chance of sustainability. All will require openness, a spirit of collaboration, compromise, and an emphasis on survival.
1. People first
Covid-19 stress has a massive impact on employee morale and loyalty. Businesses must consider and talk about cost containment and cash preservation measures, but some of these measures will have a direct impact on employees – reduced salaries to keep the business liquid, for instance. These discussions and measures are both relevant and unavoidable, but businesses will be reliant on their people to deliver the goods and services that will return them to profitability. It is important to think about ways to encourage and acknowledge staff to avoid them feeling neglected whilst implementing these very necessary measures. One of the ways to achieve this is constant communication.
Businesses should demonstrate that they are focused on saving jobs. Recognition goes a long way. Leaders could thank IT staff for keeping people connected, for example, or those putting themselves at risk to provide essential services. Employees feel proud of where they work when leaders step up in ways that make a meaningful contribution to fighting the pandemic. Leaders should be visible and spend some time scenario planning for post-Covid, involving their staff in this process and allowing them to ask their ‘what-if’ questions.
Talent retention and management is crucial to avoid losing good people. Leaders should communicate that while drastic times call for drastic measures, employees have a significant role to play once the crisis subsides.
2. Prioritise cashflow and liquidity
Cashflow is lifeblood. The immediate priority is to ensure that while the business is starved of cash inflow, what is available is stretched. We suggest setting up discussions with creditors to investigate new arrangements to ease the situation in the short term. These must be undertaken with the awareness that they are probably also struggling with their own challenges, which means that proposals are likely to be met with resistance. It is in creditors’ interest that the business survives as leadership works to find a workable way forward.
Another important engagement is with the principals from whom property and equipment are leased. In cases where the business is unable to utilize these assets to generate cashflow, it will not be able to honor its normal payment practices. Leaders need to enquire whether adjustments can be made to lease and payment terms.
The largest cost for most businesses is human capital and Agile believes that focusing on people is critical. In terms of immediate survival, we advise businesses to talk openly with their staff and try to get consensus. One possibility is to agree on reduced salaries for a while with a plan to catch up what is due at a later stage. These conversations will be difficult, but the survival of the business is at stake and leaders will need to be open.
3. Plan for profitability
Even if the business can trade, revenues are almost certainly significantly reduced. Yet profitability is arguably the most important point of defense in overcoming this situation. In the face of Covid-19, leaders must think critically about whether the existing business will serve the needs of customers affected by the realities of Covid-19 and pivot if necessary, to adapt to new norms. Service lines and their relevance need to be critically evaluated and perhaps the way in which services are provided needs to be adapted.
Clarify fixed and variable costs and work to reduce variable costs. This could entail, for example, returning rented equipment that is not currently in use. Fixed overhead costs are more complicated as there are generally contracts in place, but engagement will reveal whether there are ways to proactively limit costs. By doing so, the business may be able to reach break-even so that it can rebuild from a strong position after the immediate threat has subsided.
4. Funding and sustainability
If the business is funded by external debt (loan funding with specified terms), liquidity and cash will be needed to service this debt. Typically, debt funding involves funders and third parties who require payment at fixed intervals. If these are not met, the business will be in default which could result in the lender calling on security, instigating business rescue, or even liquidation proceedings. There is much talk around force majeure – clauses in contracts which can be invoked when either party is unable to meet their obligations due to factors outside of their control. We suggest investigating contracts with lenders to see whether the lockdown or other aspects of the pandemic qualify as force majeure events. At the very least, it provides scope to engage that the balance sheet does not allow for the normal servicing of the debt and that this impact could not have been anticipated.
Equity-funded businesses have investors who provided capital injections for long-term returns. As shareholders and co-owners of the business, this capital is much more patient. Once all avenues with lenders have been exhausted, shareholders may inject further equity in several ways, such as shareholder loans or direct equity injections.
The balance sheet must be adequately funded finding the right balance between debt and equity for long-term sustainability. Too much debt is a significant risk, yet it does not make sense to be exclusively funded through equity from a financial engineering perspective.
Private equity partners can help
In addition to practical support and advice that equity partners can provide, there may be new transactions, mergers or acquisitions that would be beneficial. With a current portfolio of 14 companies across various sectors in South Africa, Agile Capital is actively seeking opportunities in various sectors in the form of partnerships with businesses that meet our criteria for investment.
Agile Capital is sector agnostic and engagements with potential partners are tailored to each opportunity. Solid enterprises with strong management teams or which are an owner-driven business can obtain more information on www.agilecapital.co.za.