COVID-19's likely impact on the Economy: insights from previous recessions and potential strategies
Updated: Mar 31, 2020
COVID-19 is an unprecedented event which is causing major damage, not only from a sanitary standpoint but also to the overall Economy.
As Corporates and Private-Equity investors rightfully focus on near-term emergencies, we thought it could be useful to stand back and reflect on earlier recessions to try and understand what may happen, in order to develop appropriate strategies to respond to the (likely) upcoming downturn. The highlights of our findings are below.
At a macro level, we found that not all sectors perform equally during downturns
While the overall economy generally takes a hit, some sectors such as Consumer Staples, Utilities or Healthcare can come out of downturns relatively unscathed or even fare well
Similarly, while during the 2008 recession M&A activity was down across the board, with falls in deal flow and valuations in all sectors, multiples in Healthcare and Industrials took the longest to recover
Digging deeper, we identified pockets of opportunity and potential best practices
The majority of best-performing stocks post 2008 were in “recession-proof” sectors: positive market momentum can happen even during downturns
Other top-performers that that did not enjoy positive sector dynamics found success through a variety of strategies which included cost-cutting, but also continued investments in organic and inorganic revenue growth
M&A in particular, proved to be a very powerful value-creation mechanism during those times
Mergers executed during downturns delivered better returns than mergers executed during upturns
PE portfolio companies also performed better than non-PE peers, especially during downturns
Implications for Corporates and PE investors: Keep an eye on the long-term and a growth focus, while addressing immediate needs
(1) Address immediate needs – Set up a crisis center, enable remote work, assess cash needs, establish a new line of credit, renegotiate commitments
(2) Execute on strategies for long-term growth – Invest for growth and pursue M&A opportunities. Potential actions include:
Corporates: Assess how your industry performs in recessions and overlay your competitive position to develop and execute on context-relevant growth strategies – For example, stepping up investments in marketing and customer acquisition where the sector growth momentum is positive, or leveraging a robust balance sheet to acquire competitors
Private Equity investors: The downturn may provide an opportunity to develop new investment theses – For example, leverage insights around a sector’s historical dynamics and level of fragmentation to identify roll-up opportunities and build market “champions”, at moderate valuation levels
In any case, do not forego investments in organic growth and R&D: Upturn “winners” are often the result of investments made during recessions
For more details on our analysis, please CONTACT US.