key: cord-0935143-rc0vsc1a
authors: Gompers, Paul A.; Kaplan, Steven N.; Mukharlyamov, Vladimir
title: Private Equity and Covid-19
date: 2022-04-14
journal: Journal of Financial Intermediation
DOI: 10.1016/j.jfi.2022.100968
sha: 2514e7938238df3fa393399eed4556770b71b372
doc_id: 935143
cord_uid: rc0vsc1a

We survey more than 200 private equity (PE) managers from firms with $1.9 trillion of assets under management (AUM) about their portfolio performance, decision-making and activities during the Covid-19 pandemic. Given that PE managers have significant incentives to maximize value, their actions during the pandemic should indicate what they perceive as being important for both the preservation and creation of value. PE managers believe that 40% of their portfolio companies are moderately negatively affected and 10% are very negatively affected by the pandemic. The private equity managers—both investment and operating partners—are actively engaged in the operations, governance, and financing in all of their current portfolio companies. These activities are more intensively pursued in those companies that have been more severely affected by the Covid-19 pandemic. As a result of the pandemic, they expect the performance of their existing funds to decline. They are more pessimistic about that decline than the venture capitalists (VCs) surveyed in Gompers et al. (2020b). Despite the pandemic, private equity managers are seeking new investments. Rather than focusing on cost cutting, PE investors place a much greater weight on revenue growth for value creation. Relative to the 2012 survey results reported in Gompers, Kaplan, and Mukharlyamov (2016), they appear to give a larger equity stake to management teams and target somewhat lower returns.

Private equity (PE) investors are typically viewed as quintessential shareholders. They usually own a majority of the equity in the companies within their portfolio, take active roles in governance and operations, and seek to maximize the value of their investments given that private equity managers are typically compensated with a large share of the profits of the investments in the funds (Gompers and Lerner (1999) ). Jensen (1989) argues that private equity represents a superior organizational form compared to dispersed public ownership. Research, including Kaplan (1989a,b) , Acharya et al (2013) , Davis et al (2014) , has consistently shown that PE firms increase the productivity of their portfolio companies. PE returns also have consistently outperformed the public markets both gross and net of fees (Harris et al. (2014) and

Brown and Kaplan (2019)).

Covid-19 dramatically and unexpectedly shocked the global economy. In the short-run, financial performance, including revenue and cash flows, have been significantly affected.

Additionally, uncertainty about the future of the pandemic potentially hinders the ability to make new investment decisions. In response to this shock, we have undertaken a survey of the private equity industry to understand investors' responses to this crisis. The survey provides three sets of insights about how highly motivated owners of companies are managing the economic implications of the crisis. First, we show how the pandemic affected the overall strategy and operations of PE firms. Second, given that Covid-19 is an exogenous shock to economic performance, we ask private equity managers to divide their portfolio into three categories of firms: those affected positively or unaffected by the pandemic (green light), those moderately affected by the pandemic (yellow light), and those severely affected by the pandemic (red light).

By comparing across green, yellow, and red light companies, we consider how important different actions are for maintaining value across differential economic shocks to performance, particularly underperforming firms. Third, by comparing the current survey results to those in Gompers, Kaplan, and Mukharlyamov (2016) (GKM 2016 ; a survey of the private equity industry from 2011 to 2013), we study how the industry has adapted over time and from more -normal‖ times. 1 We survey more than 200 private equity (PE) managers from firms with $1.9 trillion of assets under management (AUM), across a spectrum of investment strategies, size, industry specialization, and geographic focus. First, we establish that the Covid-19 pandemic has had a meaningful impact on private equity firms by asking them to assess the health of their existing portfolio companies. On average, 50.8% of private equity firm portfolio companies are unaffected by the pandemic, 39.9% are somewhat affected, and 9.4% are severely affected. The outlook for the performance of our sample's existing private equity portfolios (both internal rate of return and the multiple on invested capital) has been negatively affected. This will make outperformance of public markets, particularly the S&P 500, difficult going forward.

Next, we asked PE managers about the target capital structure policies for their existing portfolio companies. Debt maturity for both bank and other long-term debt has fallen significantly-from 5.25 years in 2012 (GKM 2016) to 4.23 years in 2020 for bank debt and from 6.89 years to 5.01 years for other long-term debt. Target debt-to-capital ratios have also fallen-from 55.8% to 44.6%. These changes are consistent with an increased riskiness of the portfolio companies and a desire to finance their companies more conservatively. Almost a quarter of portfolio companies have experienced a covenant violation, and PE managers target debt refinancing in approximately a third of their existing investments.

In response to the Covid-19 pandemic, 72.2% of our sample PE managers have extended the investment horizon for existing portfolio companies. At the same time, PE managers are still seeking to gain liquidity in their portfolios through exits, with strategic sales viewed as the most attractive.

We also explore the impact of the pandemic on investment decision-making. In the current crisis, private equity managers still spend a significant portion of their time sourcing and evaluating new investments. Among the criteria that PE managers use to evaluate new investment opportunities, business model ranked as the most important followed closely by the management team. When asked where they expect value creation to come from, the PE investors overwhelmingly pointed to growth in revenue as the key driver with reduction in costs a distant second.

Our survey also asks about the internal operations of the PE firms. We seek to understand whether time allocation of investment and operating partners has changed given the external shock of Covid-19. We find that both investment and operating partners are spending the bulk of their time helping existing portfolio companies. At the same time, investment partners are still spending 17.7 hours per week finding and evaluating new deals. In total, investment partners are working nearly 60 hours per week while operating partners are working in excess of 50 hours per week. Investment partners also are meeting with limited partners 3.6 hours per week.

Roughly 21% of limited partners have expressed a desire for reduced capital calls.

Additionally, despite the pandemic, PE managers are optimistic about both their own performance and that of the PE industry overall. 91% of managers believe that their fund will outperform the public markets with 35% believing the performance will be much better.

Similarly, 88% of PE investors believe that the overall PE industry will outperform the public markets with 11% expecting that performance to be much better.

The next set of analyses explores in detail how PE managers are assisting their portfolio companies. Kaplan and Strömberg (2009) classify three types of value increasing actionsfinancial engineering, governance engineering, and operational engineering. These valueincreasing actions are not necessarily mutually exclusive. In this paper, we consider those three main types of PE managers' involvement with their portfolio companies. In doing so, we look at operational and governance engineering, both of which are meant to improve operations and maximize cash flows of the business. And we look at financial engineering that is designed to improve firms' liquidity and ensure that portfolio companies have the financial resources that they need to survive until the pandemic is over. Financial engineering in light of a reduction in current operating cash flows may be necessary to ensure portfolio companies do not default on their debt obligations.

For severely affected portfolio companies, we find, unsurprisingly, that the most common activities for PE managers are reducing head count and reducing costs. These activities are much less important for firms that are relatively unaffected. Similarly, replacing management is far more likely in severely affected companies than in unaffected companies. On the other hand, providing general operational and strategic guidance as well as recruiting new board members is similar across all three categories of companies.

The most consistent financial engineering strategy that PE managers employ to improve liquidity is drawing down portfolio companies' revolving lines of credit (revolvers). The more severely affected the portfolio company, the more likely the PE manager is to draw down the revolver. Larger and older PE organizations exhibit a significantly higher propensity to draw down revolvers. A second source of potential liquidity is equity investments. The vast majority of PE managers who indicate a desire to raise equity in existing portfolio companies indicate that the source of the equity would likely be the existing fund that had invested in the company, not a later fund or a third-party fund. Smaller PE firms, which likely have smaller portfolio companies, also are more likely to help their companies access the Paycheck Protection Program (PPP). Some PE managers indicate a desire to refinance the debt and to extend maturities.

Next, we consider how private equity managers are evaluating and structuring new investments. Rather than focusing on cost cutting, PE investors place a much greater weight on revenue growth for value creation. The weight appears at least as great as it was in the 2012 survey in GKM 2016. The PE investors appear to be giving a larger equity stake to management teams than in the previous survey. They also appear to target somewhat lower returns for new deals. For new investments, the PE managers target IRRs averaging 22.6%, but that target is lower than the 27.0% reported in GKM 2016.

Finally, our paper provides a one-time snapshot of PE firms' assessment of the pandemic as of August 2020. At the time, the PE firms felt that performance of their existing portfolios would be negatively affected by the pandemic. Given the subsequent buoyancy of equity and financing markets as well as the intensity of the response by the PE investors, it is possible they were overly pessimistic. In the last section of the paper, we use we use performance data on U.S. buyouts from Burgiss and find that the PE firms were overly pessimistic.

The paper proceeds as follows. In Section 2, we describe our research design and report summary statistics. In Section 3, we report our results. In Section 4, we conclude.

We created the survey to determine how the Covid-19 pandemic has affected PE investors. We also designed the survey with the intent of comparing answers to our prior survey from 2011 to 2013, primarily in 2012, in GKM 2016. We initially tested the survey on a small number of PE investors in May 2020. We revised the survey to reflect some ambiguities in our questions and to add some additional questions. The final survey includes 54 questions and is available on Paul Gompers's website.

We distributed the survey to PE investors during July and early August 2020. We distributed it to the alumni of Chicago Booth and HBS employed in PE and to investors where one of the co-authors knew or was introduced to a senior investment professional. We received our last survey response in early August 2020. The vast majority of survey responses, therefore, were received in July 2020.

We invited a total of 1,180 investment professionals to participate in the survey by filling out an online questionnaire. Of these, 272 filled out some part of the survey; the median respondent answered 96% of the survey questions shown. 2 The response rate of roughly 23% is much higher than the response rate for related surveys. Graham and Harvey (2001) The 272 individual responses correspond to 214 PE firms. For PE firms with two or more respondents, we obtain a firm-level response by averaging the responses of the individual investors. We also study the within-firm variation in responses obtained from multiple people and establish notable agreement between them. 4 This is consistent with the survey's efficacy in eliciting meaningful information. In addition, among participants who handled the survey in one sitting, the median respondent dedicated 15-16 minutes to the questionnaire. Given how senior the sample participants are in their PE firms' hierarchy (Panel C of Table 1 ), they have clearly taken the survey seriously. While there is significant overlap in respondents in this survey to GKM 2016, we highlight several characteristics of the overall PE industry and how it has evolved since 2012 in order to assess comparability of the samples and potential factors that have influenced the responses. From Preqin we are able to identify 2,182 PE firms in 2020, that is up from 1,431 firms in 2012. Average (median) firm size was $3.1 billion ($342 million) in 2020 versus $1.4 billion ($300 million) in 2012. Both the number of very large PE firms as well as the total number of firms has increased substantially. Average PE firm age has also increased from 13.4 years in 2012 to 17.7 years in 2020. In 2012, approximately 45% of PE firms were less than 9 years old, their average age being 4.5. In 2020, approximately 25% of PE firms were under 9 years old, their average age being 5.25 years. This is consistent with the entry of firms having decelerated.

Given these changes over time and the slight differences in samples, when we compare GKM 2016 results to the current survey, we use a matching procedure to ensure comparability.

We limit our comparisons exclusively to funds headquartered in North America and Europe because GKM 2016 had very few firms headquartered outside these regions while the current survey has many firms outside North America and Europe. For every PE firm in Preqin that is headquartered in North America and Europe, we looked up the year in which the firm was established and measured its AUMs in 2012 and 2020 based upon total funds raised in the preceding 10 years. For each of our 2012 and 2020 respondents we compute five attributes: 1) position in the AUM distribution of that year's universe of funds, 2) position in the age distribution, 3) distribution of industries in which they invest, 4) distribution of regions in which they invest, and 5) distribution of investment strategies (e.g., buyout, add-on, growth capital, etc.) We calculate a standardized scalar distance for each dimension (1-5) between 2020 and 2012 respondents and then produce an average distance. In order to create a matched sample, we iterate through the 2012 respondents and pick the nearest neighbor from the 2020 sample headquartered in the same geography. 6 Figure 1 reports histograms and suggests that the PE firms in matched samples appear comparable. 7 We then contrast the responses for the matched 2012 and 2020 samples.

We start the analysis by measuring the pandemic's impact on individual PE firms. In the survey, PE investors assessed the relative fraction of their portfolio that is unaffected or positively affected by the pandemic (green light), somewhat affected (yellow light), and severely affected (red light) by the Covid-19 pandemic. Table 2 shows that PE investors believe that 50.8% of their portfolio companies are unaffected by the pandemic, 39.9%somewhat affected, and 9.4%severely affected. The heterogeneity in these numbers across firms allows us to examine the differences between investors with portfolios struggling the most because of the pandemic versus those with portfolios struggling the least. Because PE portfolios are persistent and exhibit little turnover-even amid the exogenous shock of the pandemic-such comparisons highlight actions PE managers take at various stages of distress.

The pandemic's true impact on each PE firm is a weighted average of its true impact on each company within that PE firm's portfolio. This granularity is unavailable to us. The survey's level of detail is a trade-off between-on the one hand-collecting enough information to produce rankings approximating those implied by the pandemic's true impact and-on the other hand-not making the questionnaire too burdensome for participants.

To calculate a parsimonious impact score using the fractions of unimpeded, somewhat affected, and severely affected portfolio companies, we need to make the following assumptions.

First, portfolio companies carry equal weights within each portfolio. 8 Second, even though the 6 We also require that the matches are within 10 percentage points of each other's position in the age and AUM distributions. 7 In fact, a third of the firms in matched samples (21 out of 58 in each year) are the same firms. 8 The aforementioned fractions apply to the count of portfolio companies in each category of impact. We do not have the data on the relative sizes of portfolio companies within each group, let alone the PE firms' equity stakes. Since such variations likely true impact may vary within a group, the score assigns the same downside to all portfolio companies in that category across all PE firms. In other words, a portfolio company is comparable-in terms of the pandemic's impact on it-to other companies in the same category of impact across all portfolios. 9

Sorting PE firms by the pandemic's impact is the purpose of the score. Hence, its scale is unimportant, and we normalize it to vary from 0 (all portfolio companies are green) 10 to 100 (all portfolio companies are red). This implies that a 1 percentage point increase in the fraction of severely affected portfolio companies raises the impact score by 1 unit (toward a maximum value of 100), other things being equal. The free parameter is the score's sensitivity to an increase in the fraction of somewhat affected companies (yellow light). In what follows, we assume that each severely affected company contributes twice as much downside to the overall portfolio as each somewhat affected company. 11 As such, the Covid-19 impact score is computed using the formula . we see several reasons why the results in the paper run deeper. First, wide standard deviations average out in the sample without creating a bias and given the lack of a viable alternative, assuming equal weights in a portfolio appears reasonable and safe. 9 Since the pandemic's outset, segmenting PE portfolios into green, yellow, and red categories has become an industry-wide practice. For example, the April 2, 2020 report by McKinsey says: -To focus limited support resources on the most vulnerable businesses, many operating groups have adopted the traditional -red-yellow-green‖ traffic-light system to indicate the level of engagement and support each business will need.‖ 10 The question grouped unaffected and positively affected portfolio companies in the same category (green light). Strictly speaking, some portfolios, in spite of having somewhat and severely affected companies, might have benefitted from the pandemic if their green-light category includes firms with a sufficiently high positive impact. We rule out such cases due to the inability to distinguish unaffected and positively affected portfolio companies. This simplification hardly impedes future analysis. While numerous VC-backed portfolio companies have benefitted from the pandemic (Gompers et al. (2020b)), PE firms invest into more mature companies with a lower upside potential. 11 We settled on this ratio of the score's sensitivities with respect to severely and somewhat affected companies out of simplicity. However, since the ratio is arbitrary and not grounded in theory, we have confirmed that the paper's results are robust to alternative specifications of the Covid-19 impact score. In particular, we have tried score's sensitivities with respect to the somewhat-affected fraction of a portfolio from 5 (i.e., a severely affected company carries 20 times as much downside as a somewhat affected company) to 95 in increments of 5. We thank the referee for suggesting this analysis. exist around 50/40/10. Second, these deviations relate meaningfully to more granular ex-ante portfolio characteristics as well as to the specific ex-post actions taken by PE firms. Table 3 shows the relation between a PE firm's portfolio characteristics and the impact of the Covid-19 pandemic. Panels A and B present the industry and country compositions, respectively, in terms of the number of investments. In our sample, no industry or country single-handedly explains, in a statistically significant way, a PE firm's Covid-19 impact. This is unsurprising given the pandemic's global nature. However, the health crisis has played out differently across countries and industries; for some industries, the pandemic has been a boon.

Directionally, the results are in line with intuition.

Resilient PE firms are more active in Software, Healthcare, Financial Services, Insurance, and Shipping. Geographically, their portfolios lean toward the US, the UK, Canada, Australia, and Israel, among others. Vulnerable PE firms have invested more in industries-Consumer

Products, Retail, Leisure, and Oil & Gas-and countries-Germany, Brazil, Japan, the Netherlands, and Italy-that took the brunt of the pandemic. 12 We also use the industry and country portfolio weights to calculate a set of Herfindahl-Hirschman Indices (HHI) for each PE firm. Suggestive-yet weak from the statistical significance standpoint-evidence shows that the PE firms impacted more by the pandemic had entered it with more diversified (i.e., less concentrated) portfolios. This relation softens, though directionally remains present, if we remove Software from the construction of HHI. Software carries the largest portfolio presence in our sample and has also been a significant beneficiary of the pandemic. 13 Similar, though slightly weaker, considerations apply with respect to countrybased HHI. More impacted PE firms had entered the pandemic with more diversified portfolios.

This association does not hinge on our sample's proclivity to invest in US-based portfolio companies.

The portfolio concentration results suggest that diversification has been a poor shield against the pandemic with its global and systematic nature. Instead, the PE firms that happened 12 This classification is purely data-driven. Resilient (vulnerable) are categories to which less (more) affected PE firms dedicate a higher fraction of their holdings in the majority of investment periods reported in Table 3 . Listed within each group are the Top-5 categories with the largest average portfolio weight. For brevity, we do not report sectors and geographies representing tiny fractions of an average sample firm's portfolio or having weights not clearly correlated with a PE firm's Covid-19 impact. 13 Removing Healthcare in addition to Software yields analogous results.

to have portfolios concentrated in a small number of specific industries and countries that were more resilient came out ahead of institutions whose broader diversification created exposure to more vulnerable sectors and regions.

Taken together, these results support our use of the self-assessed classification of portfolio companies into green, yellow, and red categories and our aggregation of these fractions into an impact score.

It is possible that the results on Covid-19 impact are driven by a shift in PE investment to software and healthcare deals that we will loosely refer to as tech. In this section, we discuss whether the industry composition changed and whether that change might have affected the impact of the Pandemic. Next, we combine software and healthcare and consider whether there is a difference in software and healthcare investment between the Low and High Covid-19 impact firms. The Low impact firms are modestly, but not statistically significantly more invested in software and healthcare. A sort from the other side reveals a consistent story. PE firms with an above-median tech exposure do not report significantly lower Covid-19 impact scores.

It appears that PE firms highly impacted by Covid-19 did not have a particularly high or low exposure to a specific industry. Rather, they were more invested into a subset of business models (within industries) that happened to be doing poorly amid the unusual and unprecedented disruptions of the Covid-19 pandemic (e.g., social distancing). Business models amenable to a touch-and crowd-free delivery of goods and services-irrespectively of the industry-had the potential of doing well, especially if catering toward customers with jobs that turned out resilient in the pandemic.

Overall, this suggests that the secular shift toward software and healthcare is second-order in explaining the resilience of PE-backed firms to Covid-19.

We first ask how the PE managers expect the current Covid-19 pandemic to impact fund performance. We asked the PE investors how they thought the pandemic would affect the IRRs and MOICs on their existing funds. When we compare these results to those of a similar and contemporaneous survey of venture capital industry (Gompers, Gornall, Kaplan, and Strebulaev (2020b)), we find that the PE industry is more affected by the Covid-19 pandemic. In the venture capital (VC) survey, although a similar percentage of the portfolio was negatively affected (10%), the VCs expected declines in IRR (MOIC) of only 1.6% (0.07).

The declines in PE IRRs and MOICs also appear substantial compared to the return on the S&P 500 through the end of July 2020. At that time, the S&P 500 had a positive year-to-date total return in 2020 of 2.5%, driven, in particular, by the success of the large technology companies. That performance may make comparisons of PE returns to the S&P 500 challenging for existing vintages. The comparisons will be less challenging with the less technology heavy

Russell 2000 which had a year-to-date total return of -10.4% at the end of July 2020.

We also highlight several salient differences between GKM 2016 and the current survey.

In Panel C, we look at changes in the target rate of return for new investments in both surveys. interact multiple times per week while 6.8% interact daily. This is substantially higher than the rate of portfolio company interaction in Gompers, Gornall, Kaplan, and Strebulaev (2020b) for

VCs. VCs meet with 26% of the portfolio once a week, 26% multiple times per week, and 2%

daily. In the current crisis, PE managers appear to be more hands on than VCs.

Kaplan (1989b) showed that taxes are one source of value in leveraged buyouts. Jensen (1989) argued that leverage imposed financial and operating discipline on company executives and avoided agency costs of free cash flow. We asked PE managers about the target capital structure policies for their existing portfolio companies. Unlike target IRR discussed earlier, these changes are consistent with an increased riskiness of the portfolio companies and a desire to finance their companies more conservatively.

In matched samples, though marginally smaller, these differences remain economically and statistically significant. Moreover, the analysis of comparable PE firms reveals that debt-to-EBITDA ratios increased from 3.99 in 2012 to 4.51 in 2020. This is consistent with PE firms calculating these ratios in the pandemic under the assumption that EBITDAs would in time bounce back from temporarily deflated levels. However, maintaining liquidity and avoiding default is potentially a critical concern for PE investors. We also asked PE managers in what fraction of their portfolio companies they sought to refinance their debt. Panel B of Table 7 shows that our PE managers target debt refinancing in 30.5% of their portfolio companies. When we asked the managers to rate the reason for seeking to refinance (Panel C of Table 7) , extending the maturity of the debt rated the highest at 6.1 (on a scale from 1 to 10) followed by the low current rates at 5.2 and (potential) covenant violations being next at 5.1. Larger PE firms rated extending the maturity of the debt (6.6) significantly higher than smaller firms (5.5), but for both categories extending the maturity of debt still ranks as the number one reason for refinancing. The ordering changes, however, once we take into account the impact of Covid-19.

PE firms with the below-median impact report the low current rates as the main reason for refinancing and relegate extending maturity to the second spot. Above-median affected PE firms, in contrast, view the low current rates as a third-order factor and maturity considerations as first-order. This suggests that extending debt's maturity is not an unconditional desire, but rather a tool used to create value in challenging times. Extending maturity of debt creates option value for companies, extending the period of time over which a post-pandemic recovery can occur before the company potentially defaults on its debt obligations.

Exiting investments is a critical element of the PE process. We asked a set of questions concerning whether and how exits might be affected by the Covid-19 pandemic. Given the turmoil in operations identified above, one might expect that exits are not top of mind for PE firms. In Panel A of 

To this point, our analysis has largely focused on how PE managers engage with their existing portfolio companies. In this section, we examine how the Covid-19 pandemic has affected decision-making on future investments.

GKM 2016 identify deal sourcing and deal selection as important elements of the PE investment process. We find in Table 10 that virtually all PE firms (94.6%) in our sample are still seeking new investments. At the same time, 14.6% of our respondents indicated that they anticipate that they will walk away from signed deals. While these may seem at odds with each other, clearly the terms agreed to prior to the onset of the pandemic may be unattractive after.

The extent to which a PE firm's portfolio was impacted by Covid-19 is related to its propensity to seek new investments. 99% of the less affected investors (impacted below-median) are pursuing new investments, whereas only 90% of firms whose portfolio companies are severely affected are pursuing new investments. This distinction likely stems from two factors:

1) higher impacted firms may need to set aside capital for equity infusion into existing portfolio companies struggling with liquidity and 2) private equity managers whose portfolios are more severely affected may be spending more time assisting portfolio companies. With the pandemic's expected duration being a proxy for its economic impact, we have confirmed that the two subsamples of firms are equally wary. That both groups anticipate the pandemic to last for approximately one year (as of completing the survey in July-August 2020) bolsters the binding capital constraints argument.

We next asked PE managers what factors they considered most important when deciding whether to invest. In Panel A of Table 11 , we see that business model is the most important investment factor with an average rating of 8.5 followed by management team (8.0), ability to be cash flow positive (7.7), and ability to add value (7.7). These patterns are similar to those in GKM 2016 where the PE investors also rated the business model as the most important factor followed by the management team. Similarly, the difference between cost reduction (or operational improvements) and multiple arbitrage is much smaller in the current survey. Given that we conducted the survey in August 2020 during the high uncertainty of the pre-vaccine portion of the Covid-19 pandemic, one might have expected a stronger emphasis on cost-cutting.

We acknowledge, however, that the conclusion that growing revenue has become relatively more important than reducing cost is not definitive for two reasons. First, the language in the GKM survey is not identical to that in the current survey. While, we believe that most industry practitioners use the phrase operational improvements as a euphemism for cost reduction, we decided to use the more precise term in the current survey. While we also believe that practitioners would view -Growth in revenue of the underlying business‖ as equivalent to -Growth in the value of the underlying business,‖ it is not guaranteed that every respondent had this interpretation. Second, the respondents in GKM 2016 identify increased revenue and cost reduction as a pre-deal source of value in, respectively, 70.3% and 35.6% of deals (Table 23 on p. 466). However, this comparison shrinks substantially post-deal-69.5% and 47.4% (Table 25 on p. 468).

Finally, we asked what fraction of considered investments would end up in an actual investment. We find that 10.9% of considered opportunities are anticipated to end up as an actual investment (Panel B of Table 10 ). This is substantially higher than the 3.9% that GKM 2016 report. We find it difficult to reconcile these two numbers. Perhaps, the hurdle to be a considered deal is higher and therefore, fewer, higher quality deals are in the pipeline. In other words, perhaps the pipeline has become dramatically narrower during Covid-19 and the -denominator‖ of considered deals has shrunk.

Another critical element of investment decision-making is how much equity to provide to the management team to incentivize them. We asked PE managers how much of the equity in new portfolio companies they expect to be owned by various parties. We also find changes in target equity ownership in new deals when we compare the results of GKM 2016 to our current survey. Panel B compares the results from our earlier survey to our current sample. PE sponsors' ownership has declined from 79.6% on average to 72.9%. CEO ownership has increased to 10.9% from 8.0% while ownership of the top 10 managers and other employees has increased to 11.3% from 8.9%. These differences are all statistically significant.

When we match the PE firms that replied in both surveys, the magnitudes of all of the differences decline slightly but remain economically significant. The differences in PE ownership and ownership of top management (including the CEO) remain statistically significant, but the differences in CEO ownership and top management (excluding the CEO) become insignificant.

We considered whether the increase in equity to management can be explained by the increase in investments in tech buyoutsthose in software and healthcarethat we mentioned earlier. Specifically, we consider whether the GPs with the bigger weight on software and healthcare investments give more equity to top management and CEOs. The answer is no when we use investments since 2015. When we use investments since 2017, top management and CEO ownership is modestly (roughly 1%), but not statistically higher for PE firms with more tech deals.

We interpret these patterns as suggesting that management teams have become a more valuable and scarcer resource over time. At the same time, the move by the PE investors to invest more in techsoftware and healthcaremay have played a role.

Overall, PE firms continue to seek out new investments. The firm's business model and then the firm's management team rank as the first and second most important investment criteria. PE investors focus on growth in revenue as a source of value creation and give a larger equity stake to management.

The Table 13 finds that the vast majority of their time is spent assisting portfolio companies, 33.5 hours per week, substantially more than investing partners. The next most time-consuming category is finding and evaluating potential deals at 6.5 hours per week, significantly less than the time spent by investing partners. All the other categories take relatively modest portions of operating partners' time. On average operating partners are reported to work 50.4 hours per week, again suggesting they are highly engaged.

The total workload in hours is almost the same no matter how strongly a PE firm's portfolio was affected by Covid-19. In highly impacted PE firms, investing partners cut the time on managing the firm and spend an extra hour and a half assisting current portfolio companies and an additional hour finding and evaluating new deals. Hours not being sensitive to the pandemic's impact on portfolios suggests that PE professionals operate at their productive capacity. As mentioned above, highly impacted firms widen the labor bottleneck by bringing more consultants aboard.

Our next question looked at PE managers' perceptions of their own and the entire PE industry's performance over the next ten years. In Panel A of Table 14 , we find they are quite optimistic about their own performance. 34.9% believe they will perform much better than public markets while another 41.9% believe they will perform somewhat better. Only 1.7% think they will perform slightly worse than the public markets. Understandably, PE firms highly impacted by the pandemic display less confidence in their ability to significantly beat the stock market.

When we asked the same managers their expectations for the entire industry, they were similarly, albeit slightly less, optimistic. Panel B of Table 14 shows that 88.5% of PE managers believe the industry will outperform public markers over the next ten years with 11.3% believing performance will be much better and 41.8% believing it will be somewhat better. Only 11.5% of managers expect that PE firms will not outperform. Large PE firms are less optimistic about the industry than small PE firms. 16.1% of large managers believe that the PE industry will perform either worse than or on par with the public markets compared to 6.9% for small PE firms.

In GKM 2016, PE investors place a heavy emphasis on adding value through operational and governance engineering. PE investors indicated that they place a heavy emphasis on adding value to their portfolio companies, both before and after they invest. The sources of that added value, in order of importance, were increasing revenue, improving incentives and governance, facilitating a high-value exit or sale, making additional acquisitions, replacing management, and reducing costs. Consistent with adding operational value, the PE managers make meaningful investments in employees and advisors who provide advice and help in implementing operating improvements. Additionally, PE managers put a strong emphasis on implementing high powered equity incentives to their management teams and thought those incentives are very important.

They also focused on creating smaller board of directors with a mix of insiders, PE investors, and outsiders.

Based on the classification from 

In the earlier survey, PE investors also placed importance on financial engineering, i.e., putting in place the type of capital structure that could potentially enhance value. PE investors appeared to rely equally on factors that are consistent with capital structure trade-off theories and those consistent with market timing. The results were different from those for the CFOs in Graham and Harvey (2001) . The market timing result was consistent with the results in Axelson, Jenkinson, Strömberg, and Weisbach (2013) . Drawing down revolvers and accessing the PPP program are both non-dilutive (from an equity perspective) ways to raise cash for portfolio companies. We also asked whether PE managers if they were pursuing equity infusions for their portfolio companies. Except for the most severely affected companies, raising new equity has been a relatively infrequent activity for PE managers. In 34.5% of the severely affected (red) companies, however, PE managers actively sought to raise equity.

We also asked whether the PE firm sought to raise the equity from third parties, the same fund that had invested in the portfolio company, or a later fund. By far the most common potential source of equity is the same fund that had invested in the company. In 35.7% of the severely affected companies, PE managers were pursuing equity investments from the same fund. Third parties represent the second most frequent target source of equity financing-in 12.7% of severely affected portfolio companies. Later funds by the same manager are almost never mentioned as a source of equity financing for portfolio companies. Even in severely affected companies, only 2.5% of the time did PE managers consider an equity investment from a later fund. This is consistent with the conflict of interest perceived by limited partners in crossfund investing.

We find significant differences when we compare different types of PE firms. For example, across all portfolio company categories (green/yellow/red), small PE firms are far more likely to help their companies participate in the PPP program. This is perhaps not surprising because much of the PPP program was targeted at smaller businesses and smaller PE firms hold smaller companies in their portfolio. Older and larger PE firms are more likely to be helping their portfolio companies draw down their revolvers across each category of portfolio companies (green/yellow/red). For equity investments, there is no consistent pattern of activity across fund size or age.

Overall, we find that PE firms are active in seeking additional cash for their portfolio companies. Non-dilutive financing (either bank revolvers or the PPP program), unsurprisingly, is preferable to outside equity. Outside equity appears to be an option in only the most severely affected companies.

Our paper provides a one-time snapshot of PE firms' assessment of the pandemic as of The PME measures the performance of private equity relative to investing in the S&P 500. 16 A PME greater than 1.0 implies that the performance exceeds the S&P 500. Harris et al.

(2014) provide a description of Burgiss PME and earlier PE performance. We begin using the 2005 vintage because funds of earlier vintages are largely realized and are unlikely to change.

We end with the 2017 vintage in order to allow the portfolios to have some time to reflect performance. Later vintages also will still include new investments that are more likely to be valued at cost. PE managers believe that 40% of their portfolio companies are moderately negatively affected and 10% are very negatively affected by the pandemic. The private equity managersboth investment and operating partners-are actively engaged in the operations, governance, and financing in all of their current portfolio companies. These activities are more intensively pursued in those companies that have been more severely affected by the Covid-19 pandemic.

They include helping to reduce headcount and non-headcount costs, providing strategic and operational guidance, and helping to insure liquidity by drawing down revolvers, using the PPP and raising equity. Less frequently, they replace senior management. The PE investors are more active in their portfolio companies than the VCs surveyed in Gompers et al. (2020b) . This is strong evidence that PE investors are operationally active in their companies, more so when the companies have problems.

As a result of the pandemic, the PE investors expect the performance of their existing funds to decline. They are more pessimistic about that decline than the VCs surveyed in Gompers et al. (2020b) . This is perhaps not surprising, but is consistent with VC being fundamentally different from PE. Relative to PE, VCs invest in early stage companies that have the ability to and flexibility to adjust to different market conditions and shocks. Our brief look at overall buyout fund performance since the survey suggests that the PE investors were overly pessimistic. Absolute performance and performance relative to the S&P 500 have both improved in the year since the survey.

Despite the pandemic, private equity managers are seeking new investments. PE investors place by far the greatest weight on revenue growth, not cost reduction, for value creation. If anything, this emphasis has increased relative to the 2012 survey results reported in Gompers, Kaplan, and Mukharlyamov (2016) . This is interesting in light of and not at all consistent with the frequent criticism that PE firms largely seek to cut employment and costs in their portfolio companies. Instead, this result and the similar result in GKM 2016 indicate that growing the 58 business is the most important strategy to increase value independent of the phase of the economic cycle.

Finally, PE investors appear to target lower returns and give more equity to portfolio company management teams, changes consistent with the large increase in commitments to PE since 2012 increasing the competition (and cost) of management teams as well as leading to a modest decline in targeted returns. 18 This contrasts with the VC investors in Gompers et al.

(2020b) who target the same returns they did in the previous survey. The increase in investments in techsoftware and healthcarealso may have played a modest role in the increase in equity to management teams.

These histograms compare this paper's respondents (survey conducted in 2020) and those in Gompers, Kaplan, and Mukharlyamov 2016 (survey conducted in 2012) . Nearest-neighbor matches within the same geography of a PE firm's headquarters (North America or Europe) account for five attributes: 1) position in the age distribution of that year's universe of funds, 2) position in the AUM distribution, 3) distribution of industries in which they invest, 4) distribution of investment strategies, and 5) distribution of regions in which they invest. 2011 , i.e., normal times (Gompers, Kaplan, and Mukharlyamov 2016 . Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. the fraction of portfolio companies in which the sample private equity (PE) investors have refinanced or seek to refinance the debt over the next 6 months. Panel C presents how important-on a scale of 1 (least) to 10 (most)-the specified factors are for the refinancing decisions, as indicated by a subset of the sample PE investors with plans to refinance. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. Table 9 : Exit This table describes the intention to exit investments and the attractiveness of different exit routes. Panel A reports the fraction of the sample private equity (PE) investors actively seeking to exit current portfolio companies in today's Covid-19 environment. Panel B shows how attractive-on a scale of 1 (least) to 10 (most)-the specified exit routes are, as indicated by a subset of the sample PE investors seeking exits. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. This table reports the importance in the current Covid-19 environment of the specified investment factors (Panel A) and return drivers (Panel B)-on a scale of 1 (least) to 10 (most)-as indicated by the sample private equity (PE) investors. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. Table 12 : Typical equity ownership Panel A reports the typical equity stakes in new portfolio companies as expected by the sample private equity (PE) investors in the current Covid-19 environment. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Panel B compares the typical equity stakes in new portfolio companies as reported by the sample private equity (PE) investors surveyed in July-August 2020 during the Covid-19 pandemic with the results of a similar survey conducted in 2011 , i.e., normal times (Gompers, Kaplan, and Mukharlyamov 2016 . Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. and operating partners (Panel B) spend their time (in hours) during the Covid-19 pandemic as indicated by the sample private equity (PE) firms which reported having both types of partners. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. (PE) investors' perceptions of their own performance (Panel A) and that of the entire PE industry (Panel B) over the next ten years relative to the overall stock market. The sample is divided into subgroups based on the median of the Covid-19 impact, assets under management, and the age of PE firm. Statistical significance of the difference between subgroup means at the 1%, 5%, and 10% levels are denoted by ***, **, and *, respectively. percent of portfolio companies-tabulated by the extent of the Covid-19 pandemic's impact-in which the sample private equity (PE) investors pursue specified activities: operational engineering (Panel A), governance engineering (Panel B), and financial engineering (Panel C). Green light applies to portfolio companies affected positively or unaffected by the pandemic; yellow light-moderately affected; red light-severely affected. Standard errors appear in brackets.

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