The changing climate of private equity and venture capital

There is no industry that has not been affected by the COVID-19 outbreak, and private equity (PE) and venture capital (VC) industries are no exception. Moreover, as PE and VC funds, being professional financial institutions, are investors in other businesses operating in a wide range of industries and sectors, when considering the impact of COVID-19 on PE and VC funds, one has also to take into account the impact on their portfolio companies and investments.

While generally the impact of the COVID-19 outbreak is negative, it would be an exaggeration to state that, in the case of PE and VC funds, this impact is only negative. It has changed a great deal and affected many, if not all, ways in which PE and VC funds conduct their business. It has resulted in PE and VC funds revising their short- medium- and long- term strategies. However, it has not resulted in PE and VC funds shutting down their operations, while some other businesses and industries have not been so fortunate.


The way in which PE and VC funds operate has changed in the short term, as have other businesses. The inability to travel has resulted in some investment explorations either being put on hold or conducted in a limited way from home offices. This has affected the M&A market and the number of transactions has fallen substantially, with some transactions put on hold and others delayed. The closing of transactions which were approaching their closing stages has been affected too.

While in the past closing may have taken hours or at maximum days, we currently see instances when closings are extended for weeks, with some of the documents executed electronically (even when electronic or digital signatures are not sufficient) with proper document execution extended for the time required to post the said documents or even agreeing to do a proper signing as soon as this becomes possible.

With regard to M&A, the de facto lockdown has certainly affected planned exits of PE and VC funds, requiring such funds to either delay their exits and renegotiate the terms of ongoing exit transactions, or reconsider exits strategically, particularly if portfolio companies have been severely affected by the COVID-19 crisis.

When it comes to the operations of portfolio companies, those PE and VC funds acting as shareholders in companies have an opportunity to influence the companies’ ongoing operations, and thus with their representatives on boards and in the management of those companies, PE and VC funds play more active roles in the development and implementation of measures necessary to address the short-term challenges or opportunities that these companies face. In particular, managers and executives nominated by PE and VC funds are involved in addressing personnel issues by either structuring redundancies, renegotiating  employment terms, applying for any government support that is available or, in some cases, by hiring new staff. PE and VC funds would also be involved in the renegotiation of terms with lenders of portfolio companies or other important counterparties, such as suppliers, landlords and others.


PE and VC funds that had managed to raise their funds from investors (i.e. investment capital) before the outbreak of COVID-19, now deal with opportunities that the resulting crisis has created. The value of many publicly listed companies has fallen, and those funds that had resisted making their investment before, now have a chance to make some recalculations.

The same applies to the possibilities of investing more money in the capital of portfolio companies by cashing in the companies or cashing out other shareholders. For some of these funds the financial terms of such transactions have become more attractive.

As to the funds that combined equity investments with debt financing, they have also received an opportunity to provide debt to their portfolio companies based on various instruments, including conventional loans and convertible loans. Furthermore, as acquisition financing from classical banks has become more difficult, and sometimes even impossible to receive, various “luckier” funds now have an opportunity to be involved in the transactions of those whose ability to raise debt financing has been blocked.


The long-term effect of COVID-19 may still be difficult to assess, particularly as it has still not been overcome. No doubt research analysts are looking strategically at different industries from the point of view of their long-term exposure or at opportunities for PE and VC investments. One possible result to be expected is that PE and VC investments will be affected more by diversification strategies in order not to depend on future challenges (whatever they may be), and to cope with the “new normal” whenever and whatever that will be. The other focus will be made on sustainability of investments and businesses that PE and VC funds would invest in.

Effect on Lawyers

In a similar way to PE and VC funds, the effect on lawyers working with these funds will have a different time-factor effect. At present, legal counsels are either helping their clients to complete transactions, dealing with all the obstacles, putting transactions on hold or renegotiating transactional terms and advising on the COVID-19 regulatory matters and policies. Legal counsels may be heavily involved in working with portfolio companies of the funds to help them deal with the challenges they face, or, in some limited cases, take advantage of the window of opportunity.

It is likely that once COVID-19 related limitations are largely removed, there will be a wave of disputes involving investment and financing cases, as well as bankruptcy and default situations. Furthermore, the short-term work of lawyers will be focused on developing transactional documents and terms aimed at providing contractual framework solutions for crisis situations like the current one.


By Taras Dumych, managing partner of Wolf Theiss Kyiv

Posted in Covid-19 Guidance