NC investors watch, weigh options – and worry – as coronavirus continues

Dane Huffman, Managing Editor – Triangle Business Journal

As the Covid-19 pandemic continues and states begin to peel back restrictions, investors across North Carolina are starting to look for opportunities – but not without concerns.

“We’ve seen some interesting opportunities and we expect to see more,” said Lee Roberts, managing partner of SharpVue Capital in Raleigh.

The pandemic has smashed businesses across the nation, leaving many looking to the federal government as well as the private markets for support in the storm. But the federal Paycheck Protection Program is only a limited lifeline, and an uncertain one if the crisis stretches through the summer.

Roberts noted that there are two opportunities in the short term – companies that are distressed and need capital, and others that are looking for additional dollars as an “insurance policy.”

Rick Giovannelli, a K&L Gates attorney with a focus on private equity and mergers and acquisitions, also said “some buyers starting to look at opportunities.”

“When the crisis first broke in March, many companies were in the midst of a sell process,” he said. The ones close to being completed were finished, while those early in the process were put on hold, Giovannelli said. “The idea was buyers and investors wanted to know where the bottom is before making a decision on what the valuations might look like,” he said.

“Now that we have four to six weeks of experience under our belts and some states are starting to reopen, some investors are feeling they are getting clarity on what reopening might look like.”

But Giovannelli said assessing the value of a company, and its future prospects, remains difficult. He said even “a bad certainty” is better than uncertainty for an investor, because at least an investor can weigh the clear negatives against its long-term prospects. “You don’t want to buy a business if you don’t have any idea what the near-term or long-term performance is going to be,” said Giovannelli, who is based in Charlotte.

Roberts expects some companies will not survive despite forbearance plans that give them, say, 90 days of relief. “As we get to the end of the 90 days, we will start to see some lenders lose patience,” he said.

Roberts doesn’t expect a massive surge of bankruptcies, as some have predicted, but rather “an uptick in bankruptcies as you will with any recession.” “But I’m not sure there will be a whistle blown and a wave of bankruptcies,” he said.

Capital key to recovery

But both Roberts and Giovannelli said having capital available is essential to pumping energy into the economy, and both raised concerns about perceptions of investors in the current environment.

For example, a pair of public companies, Shake Shack returned a $10 million check from PPP to the government and Ruth’s Chris steakhouse returned $20 million.

After public backlash over those examples as the PPP program ran out of funds, and continued confusion on some of the rules, U.S. Department of the Treasury issued a series of Interim Final Rules to provide guidance.

In late April, the Treasury said, “To preserve the limited resources available to the PPP program, and in light of the previous lapse of PPP appropriations and the high demand for PPP loans, businesses that are part of a single corporate group shall in no event receive more than $20 million of PPP loans in the aggregate. For purposes of this limit, businesses are part of a single corporate group if they are majority owned, directly or indirectly, by a common parent.”

That guidance is meant to address concerns about large groups sweeping up federal dollars.

Both Roberts and Giovannelli noted that companies owned by, say, a private equity firm are now reluctant to pursue federal loans even if they qualify – and those decisions could have an impact on employees down the line.

“I understand the optics and I understand the political environment,” Roberts said. “But the most important focus should be on getting relief to people who need it – to people who lost their jobs – and worrying less about what kind of financing their employer has.”

Giovannelli echoed those comments, stating private equity investors and even some with venture capital are deciding not to apply or to repay back the loans to the government. He adds most of large entities feel that they are eligible under both the CARES Act and the regulations, but because of the political backlash they do not want to deal with the reputational risk, the bad PR, that would come from having a PPP loan.

“It’s a real shame. You have borrowers who Congress intended should be able to get the loans and use money to keep people employed who are deciding – because of buyers remorse on the Congressional side and the news media – that they are going to return the proceeds and instead make hard decisions that will likely lead to laying off employees,” Giovannelli predicts.