Insights from the Operating Partners (Virtual) Forum - May 2020 Part II
Top Takeaways from the Accordion (Virtual) Forum
Accordion’s fifth virtual Operating Partners forum on May 29th encouraged operating sponsors from over 20 firms to discuss the latest developments in the current COVID-19 climate as we inch closer to a return to (new) normalcy. Here are the top takeaways:
On Returning to Work
When it comes to safely returning to work, Operating Partners (OPs) are looking to each other for best practices to implement. This means that it is more important now than ever to be engaging in this kind of collaborative discussion. To further this, one Operating Partner (OP) said that their team is pulling together all Human Resource heads at portfolio companies on a weekly basis to effectuate top down learning and to gather a state by state perspective on what’s working and what’s not working. Another methodology gleaned from this discourse was utilizing floor tape and signage available to direct the flow of foot traffic for many manufacturing-focused portfolio companies.
With more and more COVID and COVID antibody tests becoming readily available, there are questions of whether or not OPs will use testing as a method of re-opening offices. There are some concerns of the efficacy of the tests, now that there are several to choose from. The OP’s firm that brough up this concern firm has held off on testing due to the potential consequences and liability of administering the wrong test. So what happens when someone tests positive for an antibody? This OP’s firm along with many others are trying to navigate this unanswered question by continuing to discuss potential situations and best practices (e.g., separation, temperature taking, monitoring, etc.).
This also poses the question: what happens when we return to work and an employee tests positive for COVID? One OP mentioned leveraging her law firm to help with liability and developing a plan of action. Another OP indicated that a portfolio company in the healthcare business has created “pods” (i.e., groups) of employees that would work with each other in-person, and when someone from the pod tests positive, the entire pod will be required to self-quarantine. This would lessen the likelihood of exposure to mass amounts of people. The key takeaway from the OPs here is to begin planning for all potential outcomes – so that if the event occurs, there is a plan in place.
Technology was also a popular vehicle of safety measure; in one OPs fund, temperatures are being taken as employees enter the facility, and employees are required to take an online survey about their comfortability levels with re-entering the office. There are several thoughts about how to use technology within the office space and/or reconfigure the office space for social distancing when employees return. One OP mentioned utilizing sensors for the bathroom to let employees know before entering whether facilities are available – thereby preventing employees from needlessly exposing themselves and sanitizing only to return later. Some other discussions taking place are whether cafeterias should reopen and implementing arrival times to prevent overcrowded elevators.
As far as projected dates are concerned, it’s looking like most OPs located in the greater NYC area are looking to reopen their offices after Labor Day weekend. Along with that, firms are asking their employees what they would prefer to do – meaning no employees will be required to come into the office if they do not feel comfortable. Even with this projected re-opening, some other precautionary measures include: self-quarantining for two weeks after one week at the office, no guests in the office, and prohibiting the use of mass transit to get to the office – requiring anyone who needs mass transit to get to the office to remain working from home until further notice.
On M&A and Travel
The current environment presents a very unique challenge to those funds that aim to grow via M&A. Given travel restrictions, the challenge is the ability to assess the target’s management team and the dynamics therein. Several OPs mentioned that any current M&A is happening with management teams where there is already an established relationship in place. However, OPs are continuing to use technology as a substitute/augmentation; one OP’s team is leveraging drones to assist with site visits and using back door referencing even more so than usual.
The majority consensus on travel was that there is not an expectation to travel for the remainder of the year, but there were a few who raised their hands regarding the expectation that they will be required to travel for certain projects.
As we continue in the current environment, businesses are allocating more resources to technology; especially in healthcare. An OP stated how a portfolio company in physiotherapy is digitizing processes, tools, billings, and diagnostics. The business was surprised to see how much of the consumer experience can be moved to virtual. However, the OP is considering what the cap on technology investment is – meaning, the portfolio company can continue to build technology, but what happens when patients become tired of staying at home and would prefer to attend in-person as opposed to virtually? From this we can glean that if one invests mass quantities in technology and the trend begins to move back to the in-person model, one may have overbuilt an alternative infrastructure.
On Real Estate
One of the moderators, a real estate expert, mentioned that he is helping retailer clients negotiate rent based on a percentage of sales rather than continue paying the full amount. Of course, there will be a time when these clients will have to make up for these payments, but he thinks this approach will begin to pick up speed. However, he’s also seen the complete opposite – a national REIT with tenants in Texas has locked the doors on retailers who were not paying rent. As we can see here, there is a great push-and-pull happening in the real estate sector.
This OP’s clients, particularly those in New York City, are seeking alternate spaces outside of NYC. Not only will this benefit tenants from a price per square foot, but they will also have more space to 1) provide employees, and 2) implement space safety measures. Companies may learn towards utilizing the WeWork model moving forward due to the flexibility that these lease arrangements provide.
The moderator sees the current environment as different than post-Global Financial Crisis (GFC). As the economy stabilizes post-COVID, the number of vacancies will likely be higher than that of post-GFC. He further added that 2019 had the most retail closures in history and that pre-COVID, 2020 was on pace to beat 2019. Consumers are finding alternate ways (i.e., e-commerce) to go about accomplishing their shopping needs. Big picture: use what we’ve learned about consumers during this crisis for a successful return-to-normal strategy.