Transcript Blog – The Global Impact of the Coronavirus Pandemic on Private Equity
Welcome to the industry insights by SAP podcast series. My name is Josephine Monberg and I am your host. You are now listening to the COVID 19 special edition of our show. Welcome to our podcast.
Hello listeners and welcome to this episode of our podcast industry insights by SAP. We’re doing these special edition episodes, but we’re focused on how COVID 19 impacting different industries. And today we’re focusing on financial services industry and more specifically looking at private equity. And to do this, I have with me in our, well in his virtual host studio, Sean Epstein. So Sean, thanks for being with us today.
Hey, thanks so much. Yeah, it’s almost seems like yesterday we were trying to do this exact same thing. It’s, it feels like Diego for those of you that don’t know, literally yesterday we did an entire podcast, but my dogs were barking in the background and I ruined it. So here we are.
Uh, and I think what you’re also, and I think where you’re also preparing the audience for is that potentially your children could run in at any time during this recording and we’re not going to redo it. So just as a heads up to everyone listening, and that brings me, so Sean, you’re the head of private equity at SAP. What does that mean? And also where in the world are you worse, your children running around right now?
Well, uh, hopefully everyone’s going to be asleep for a little while longer. Uh, and, uh, my twins, Lincoln and Stella are, uh, in, in, in bed. Uh, they are eight years old. My oldest, Lyla is only nine, but she’s also in bed and she’s our snoozer, so we will definitely not see her. Um, we live in Arlington, Virginia, so right outside of Washington, D C right around the Potomac river and, uh, just a few miles from the epicenter of all of the US craziness, uh, in all regards. Um, and then as far as my, my role, so, so we about 10 years ago at SAP, uh, really step back and we said, look, if we were to take private equity firms who get operationally involved in their portfolio companies and who owned lots of companies and we treated them like a strategic customer, that we would have much better outcomes.
The firm relationship with SAP would be stronger. Uh, SAP has relationship with each of the companies they own would be stronger. Our ability to be more strategic across the portfolio at looking for the art of the possible and putting in front of port portfolio companies, real points of view on how we could steer their growth trajectory. Uh, the, that again, w everyone would benefit. And so for about 10 years, that’s what our team has been doing. So we spend our time working with private equity investors like KKR, Blackstone, Bain capital, etc. Sometimes it’s about their portfolio. Companies who need some help need technology, uh, that will allow them to unleash their growth potential. Um, sometimes we are speaking to them about our expertise in an industry and those investors who invest in that industry take our insights to heart, especially given our scale and history. Um, sometimes we have conversations with these private equity firms about where they’re looking to invest, especially in the technology sector since we’re, uh, generally a pretty good place to come from experience perspective. Uh, and we try to do that to help, uh, all parties.
Mm. So you really, you really spend a lot of time of course with private equity investors and they play a huge role in connecting us with new businesses and, but just in general also to create growth for the world economy. And we are living in a very like unprecedented time right now. There’s a lot of stuff happening and I’m sure that the way private equity, private equity industry is operating is being impacted as well. So what are you seeing right now in terms of the impact?
Just like us, um, they are facing this, uh, unprecedented crisis and we’re all, yesterday, my word was befuddled today. It’s going to be the amused, but we’re trying to get. Listen, I got a homeschool three kids too. Right? So I have casually three words in the beginning of the words of the day. Right. So I’m trying to, I’m multitasking here, but you know, they’re not all that different than, than we are as far as all businesses buy stuff, make stuff, self stuff for the most part. So you know like us there looking at and have been for the past, you know, several weeks or months looking at their portfolio companies and saying okay, how is the ability for us to buy stuff in order to make stuff being impacted? How is our ability to make stuff being impacted and what is the likely impact of our ability to sell stuff?
So it’s no different than what we do internally in our organization at SAP where we’re basically saying, okay, you know, we have 440,000 customers. So we divide our customers based on the impact their sector is taking on this pandemic or during this pandemic. And then we try to predict what the business is going to look like moving out. So PE firms are, are, are, are no different than we are and they’re doing that. They just have to do that based on every one of the unique businesses that they own. And they also need to think about it in the context of how long they have owned that business, what their strategy was for that business. Were they planning on selling it this year? Were they planning on selling it next year? Were they planning on going IPO as their exit? That may be a much more muted market right now or opportunity for them.
So they’re having to think about not only that the impact at a business level for each of the companies, but the impact on the investment thesis. The reason they bought the company, what they thought they were going to do with it, and then what they do with it now. Then you’ve got to go to some of the emotional and non-emotional components, right? It’s very clear that everybody has got to cut costs and they’ve got to figure out how do I cut costs quickly. So they’re going out to every supplier trying to negotiate better terms, trying to push payment terms out, potentially restructuring contracts so that they’re actually the demand that they’re, that they’re, uh, that they’re forecasting is going to be much higher in later years. And maybe they can go to vendors and restructure those contracts with less demand in 2020 so they can navigate this crisis. They’re also having to look at, you know, some of the emotional stuff, like where am I going to lay off people? And at the end of the day that we’re all people. So they, they kind of get that.
And that’s not an easy thing to do. So I think they’re there, they’re running in a bunch of different dimensions right this minute. They also, if you take another layer, right? So we sort of talked about, you know, what they thought they were going to do with the businesses, what’s going on at each business. There’s also, what do we do as a firm? Meaning that if they were a firm that purchased, um, and, and you spend most of their time doing leverage buyouts, there aren’t, banks aren’t lending right now, so that’s not going to be their strategy. Uh, at least for the foreseeable future. I mean, some would suggest that LBO’s aren’t happening again for the remainder of 2020. And I don’t know if that’s too negative or if that’s probably more close to accurate, but that seems to be the sentiment that we’re hearing. And then, so then what does that mean? If I have my own PE firm and I’ve been doing LBO’s for 20 years, what am I doing now? You know, am I looking at distress credit? Mmm. Yeah. It’s a very different world. So I think just like us, they’re trying to figure out how to adapt and reimagine what they do.
Yeah, reimagined. I was just going to use that word because what, that’s essentially what they have to do, right? Like they have to entirely reimagine their strategy. You have to rethink what they were planning because nobody could have planned for the situation that we’re in right now and that really does turn business models upside down. It forces businesses to think differently about their strategy. Moving ahead. So if we were to look even further into the future and maybe even beyond COVID 19 and what will happen when we start to recover, what do you think the longterm impact on private equity is going to be?
I think for one you’re going to see a lot more cross portfolio operational work being done in wa. And what I mean by that is if you look at the last downturn, one of the characteristics of the firms that have done the best since the last or great recession. Basically those firms had invested in operating that would work very closely with portfolio companies that had their fingers on the pulse of those portfolio companies that were involved day to day rolling up their sleeves in various activities, whether it was improving sales effectiveness, increasing HR capabilities, negotiating with suppliers, what have you and that’s been something that’s been on the rise, meaning having an operating team, and really investing in that operating team for the past five to seven years. So when we first started this, this team about 10 years ago, it wasn’t as prevalent.
It was probably, you know, a, a smaller percentage, certainly minority percentage of the PE firms that were large had operating teams that were formal and structured and well-resourced. So we’ve seen it steadily go up. But I think this is going to accelerate the pace of investments in operating teams, uh, that, that’s one thing. Look, I also think this is a buying opportunity for many PE firms. So I think you know, the, the other characteristic that you often see during downturns is the most successful fund firms afterwards go on the offense versus the defensive. So here’s a business I would have looked at or I did look at and now I can get on the dollar. Well, that’s very attractive. If I’m willing to put my capital to work and we have a lot of dry powder out there. So there, there’s absolutely a thought that, let me look at the lessons learned.
Two lessons learned. Operating teams or PE firms with operating teams did better after downturns. PE firms that got aggressive in the right sectors, uh, where they actually knew what they were doing and we’re still focused on the sectors. They were experienced that as opposed to trying to randomly go to another sector like oil and gas when you don’t know anything about it. But those that did know what they were doing and decided to go on the offensive ended up rebounding and rebounding extremely successfully after the last downturn. So I think from a few levels, I think that’s going to be what you see a lot of over the next couple of years is, is really the aggressive push to operating teams and aggressive push to, to buy on some of these value opportunities. I think if you think about technology though, this is an opportunity here look, I don’t want to be heartless, right? But these are investors who buy companies low and sell high, right? I mean, there’s a very simple flipping model for the most part. Not to be heartless, but in, during downturns, it’s generally the time where we trim a lot of the fat and organizations where we realized we actually had a lot more people doing something then perhaps we need it. Or our processes were really inefficient. And that’s why we had so many people that were doing these things. And, and that’s terrible because we are talking about people’s lives and jobs and families and careers and health insurance and all that other stuff. So, you know, again, empathy there. But what generally happens is you innovate, right? And you never hire back to the exact same level that you were at before the downturn. You actually find more efficient, more effective ways to get things done.
And one of the things that we’re spending a lot of time with private equity firms even now is trying to take a look at what is it that can make their finance department more efficient. What is it that can make their manufacturing lines more efficient? Because look, you can be the most efficient finance department in the world if you fire everybody, right? I mean you have the lowest per person, per dollar of revenue in your finance department of any company out there because you only got 1. Good job but you’re not effective. And it’s about hitting the effectiveness and efficiency balance. And technology is one of those things that’s going to be able to drive that. Whether it’s waves of automation, whether it’s AI, those things are are going to allow you to do more with less and do more than you ever thought you could do.
So we’re focused a little bit first stage on how do you do more with less. And then you start to think about how could I do even more as you use the word re-imagine, how can I re-imagine even doing more than I’d ever thought before with less and I think that’s going to be kind of cool. Um, and I think you’re going to see a lot more from the data side funneling into PE firms in a more regular real time way. I, I think the the days of of being even 30 days or 14 days behind on the key KPIs of any of your portfolio companies because you’re still putting it in Excel sheets and presenting it in PowerPoints and looking at it in a meeting, even if it is every week on Fridays, not having that real time view across your portfolio is going to be scary thing for, for PE coming out of this.
And I think they’re going to invest even though they traditionally don’t buy, you know, software for the sake of buying software internally and then allow all the port codes to use it. I think that’s going to change. I think they’re going to be buying at least a platform for them to be able to aggregate all the information from all the portfolio companies. Really look cross portfolio. Whose finance department is performing best, who’s negotiated the best rates with certain suppliers, who’s supply chain is most efficient and be able to have realtime insights into that both to predict, uh, the ramifications of things like a pandemic, which are very difficult to, to, to get your arms around, but you don’t need to have the right answer. You just need to have an approach. Here’s how I will deal with it. If supplier one goes down, I have a supplier, two options, supplier three options. They’re diversified amongst different market units. So I, have some, some security in knowing that if some sort of tragedy hits in one area of the world, I can still get my supplies from another, but they’ve gotta be able to do that and do that in real time now. I don’t think it’s okay to be lax in that and have, you know, a rear view perspective on it. So I think they’re going to get a lot more ahead of those things.
Okay. And you see COVID 19 directly accelerating digital transformation for private equity as it responds to the pandemic. You don’t think that we’ll just go back to business as usual.
You know, transformation is always, seems like in the, in the private equity world, transformation always seems a little bit like a big giant word, right? And there’s a sentiment, especially when it’s heard on a podcast that relates to SAP and they hear digital transformation, they hear long, big, complex projects, right? But as far as, you know, if you really think about it, transformation is really just about, you know, putting on the cape and turning into Superman, right? That’s, that’s a transformation. And I think with the power of information and helping you develop insights, the operating teams at private equity firms and the investment professionals at private equity firms who are already quite adapted in using you know, core fundamental analytic capabilities are even going to be emboldened further by having real time information that allows them to move certain levers in individual portfolio companies and perhaps even a little bit more, and I use the word embolden.
I’m actually wondering if perhaps part of what happens in this crisis is operating partners move from being a little bit, uh, skeptical or hesitant perhaps to get overly involved in decision making. And maybe the pendulum swings a little bit more to the right where you wouldn’t say you have heavy handedness, but there is a lot more forcefulness coming from a central governing body and PD that saying, listen, I’m looking at your supply chain here and I recognize that you’ve got deficiencies in Y and Z because I own seven other companies that do the same thing, right? So I know what the supply chain should look like. You guys are lagging. Let me give you the playbook on how to, on how to improve it. So perhaps we even go to a point where the digital transformation needs to a little bit of a transformation in the way PE firms work with their portfolio companies day to day.
So they can also benchmark using data in real time. So lastly, I just want to touch on, cause we have a lot of free offerings from SAP that we are giving to our customers and companies globally. And I know PE of course work with um, companies in all industries, but can you just quickly touch on some of the offerings that we have? So if there is someone listening from private equity, you know, that they’ll know what to do and where to go and how to use take advantage of our free offerings.
Yeah, I mean I think, um, the three that we’ve had, uh, the most rest activity around. Um, you know, one is I think that the offerings that we’re providing around TripIt pro, uh, from a travel, um, solution perspective and helping companies coordinate some of what obviously is a convoluted travel schedule for their employees. Uh, whether it’s, yeah, finding flights that actually do work, adjusting flights that, uh, have been canceled, keeping on top of those that are canceled, moving around, spend to other, uh, provisioners. I mean it’s a, that’s a complex task and we’re helping companies do that, um, during this crisis, uh, via our TripIt solutions. The second is around Qualtrics. Um, and this is our, our pulse survey. And this is really around how are you scalably figuring out the pulse of your employees in each of these businesses. So as much as we talked about the buy stuff, make stuff, sell stuff, right? You can’t do any of that without employees. And yes, we’ve also talked about the fact that we know people are going to lose their jobs during this crisis.
It’s a fact, but you’ve got to really understand what your employees, where, where your employees are, right? I mean the questions are as simple as things like does it feel like a thunderstorm or does it just feel cloudy outside? Well, what that’s helping you do from a data science and a behavioral science perspective is really kind of get a sense of where your employees, we know for a fact no one is [inaudible] for adoptive today as they were three months ago because you’re bombarded by messages, a pandemic, you’re bombarded by the effects on your business, you’re concerned about your job, your spouse, your partner’s job, your school, and at home, right? So no one is as productive, but we need to know what, where they are from their Headspace. And that’s one of the things that we’ve seen a lot of reciprocity from the private equity community cause it’s really easy, really scalable.
I can get it out to thousands of employees across hundreds of companies. Extremely simply. The third is around our Ariba sourcing, uh, components. Uh, this is where, for example, we’ve found a lot of private equity firms that we’re really trying to help the supply chain leaders and their procurement leaders in their portfolio companies identify alternative sources of goods and services. And that’s been a really phenomenal opportunity for people to use Ariba Discovery in order to find those other suppliers. So those are the ones we’ve got a variety of them and I think we’ve talked about them in other podcasts, but those three have really resonated with, with our partners.
Thank you for sharing that. And Sean, thank you so much for coming on the podcast. Um, I mean I think it’s so important in time like this that we share what, what’s going to happen with an industry, not that we can predict it, but at least to make people a little bit more aware of some of the impacts and then also what we SAP or we’re doing to help. So thank you for coming on the podcast.
Thank you so much. It was awesome.
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