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Sir Hughe Knatchbull-Hugessen, who served as the British Ambassador to China and later wrote a memoir titled Diplomat in Peace and War recalled the following conversation: “Before I left England for China in 1936 a friend told me that there exists a Chinese curse—‘May you live in interesting times’. If so, our generation has certainly witnessed that curse’s fulfilment.
While perhaps apocryphal, the curse seems to have particular resonance given the Covid-19 crisis. We can take some comfort from the fact that previous generations have felt they have witnessed that curse’s fulfilment, and lived to tell the tale.
While the current crisis will be world changing, it will not be world ending.
I would not wish to downplay the difficulties that we will all face in the coming weeks, months, and indeed years, but there are reasons for family offices operating in the private equity space to be positive. In particular, those that move efficiently from “firefighting” to laying the groundwork for future wealth creation will undoubtedly be better placed come the inevitable recovery. A lesson to be taken from the Global Financial Crisis in 2008 is that those entities which took decisive action early came out the other side quickest.
In my opinion this decisive action is nothing more or less than a renewed focus on wealth preservation and wealth creation, with a healthy appreciation for the fact that you might not be able to successfully do both at the same time.
The first step is obvious and has already been taken by most. Family offices are carefully examining their existing portfolio of assets in line with their internal benchmarks. They are looking to appropriately re-capitalise some assets, exit others, and ensure that businesses they are involved with take appropriate action within the sectors they operate. The impulse to protect what you already have is an understandable one, but I believe it should not completely inform your strategy at this point. The desire to shore up a balance sheet by (if you can) accessing government debt may seem sensible, but it also could be a futile kicking of the can down the road. Extra debt taken now will need to be repaid in the future, and while the coronavirus crisis has significantly impacted the way certain businesses operate, in others it has merely highlighted the flaws that already existed.
In summary, ensure that you are doing the basics of good family office governance to protect your asset base, but be prepared to be ruthless with underperforming assets as this will allow you to free up capital which can be deployed elsewhere to greater effect.
This brings me to the second step—wealth creation. The market before coronavirus was too hot. There was too much dry powder chasing too few genuinely good deals. As a consequence, investment opportunities were overpriced, and there was a feeling that the prudent investor was a cautious investor as the next big shakeup was around the corner. Well, it’s here and you no longer need to be afraid! While that might sound glib, perhaps the greater risk is burying your head in the sand and hoping this will all just blow over. If you solely focus on shoring up underperforming assets, shutting up shop, and hoping for the best, you are going to be missing opportunities for wealth creation. The family offices which will do best are those that are prepared to move quickly into spaces which will flourish in the post Covid-19 world—that is to say those family offices that close deals, while your competitors are busy sitting on their hands.
However, this second step is trickier to commit to. In fact, you are probably feeling uncomfortable just reading this. Who wants to invest when the world is seemingly falling apart? However, the key is “seemingly”—obviously the market is suffering what one euphemistically could call “an adjustment”, but this will not forever be the case, and if you wait for the market to hit the bottom you will undoubtedly have waited too long. The simple truth is that there is no perfect time to buy, however, as long as you are buying good value cheap, you should be satisfied. The coronavirus has, in my opinion, turbocharged the trajectory of businesses all over the world, but there are still good opportunities out there.
The key question is what assets will flourish. I certainly have sympathy for the view that it is impossible to assess the price of any given asset now, since no valuation models have a “corona case scenario”. Also, the thought of trying to do due diligence via a laptop seems anathema to someone who believes that if you are investing in a private company, looking the management team in the eye, and having the belief they can deliver the business plan, is key.
That said, there will be opportunities, and we can make educated guesses as to where they might be—medical tech, immunity boosting products, infrastructure, cybersecurity—are just a few areas which will tap into the investment zeitgeist of these interesting times.
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