9 September 2020

The New World: Dry Powder and EBITDAC

It’s a well-known fact that private equity houses, hedge funds, family offices and other investors are sitting on an enormous pile of dry powder. Bloomberg estimated that at the beginning of 2020 private equity houses alone had amassed a record US$1.5 trillion in unspent capital. The optimists amongst us are hoping – and expecting – that as we begin to emerge from the coronavirus crisis this capital will be deployed, and that M&A activity will pick up with a vengeance this autumn.

At the same time, however, we cannot ignore the fact that the world is now a very different place. The difficulties that many companies have faced over the past few months have been widely reported, but what has perhaps received less attention is that some companies have seen their revenues soar. Those with technology at their core, or which have an active online presence, have in many cases benefitted enormously from the new ways in which consumers have been accessing both goods and services. The key question is whether these companies, which investors will no doubt look at with great interest over the coming months, will experience a decline in revenue as the world returns to normal and consumers revert to their old habits, or whether the world has changed for good, in which case their success might be expected to continue.

This presents buyers and investors with an interesting dilemma. How do you value a company that has seen its fortunes change significantly – for better or worse – as a result of the coronavirus crisis? Much has been written about this and it has even spawned the new (and at first widely disparaged) acronym “EBITDAC”, the C of course standing for coronavirus.

When trying to agree the value of a target company both buyers and sellers are likely to argue that EBITDAC should be used as a performance metric, albeit for different reasons and in different circumstances. The seller of a company that has suffered as a result of the coronavirus crisis will no doubt try to argue that the company is, at its core, a successful business that will recover from its temporary downturn in performance and will use the EBITDAC figure as evidence for this in the hope of pushing up the price. The buyer of a company that has benefitted from the coronavirus crisis may equally attempt to use the EBITDAC figure as evidence that the company’s increase in revenue is only temporary, and that as the world returns to normal its revenue is likely to decrease and the company’s value should reflect this.

Buyers and investors face a difficult task in navigating this dilemma, particularly given that with so much dry powder ready to be deployed there is likely to be stiff competition for those companies that have done well from the coronavirus crisis. Some commentators are already predicting that many buyers will be willing to “overpay” for these companies – at least using traditional valuation metrics – in the hope and expectation that their success will continue.

What’s clear, however, is that buyers and investors are going to have to remain nimble and flexible, and look at each opportunity on a case by case basis, if they are to achieve value for money. There will be opportunities to be had even in those sectors that have suffered badly as a result of the coronavirus outbreak; equally some buyers and investors are likely to have their fingers burnt because even in those sectors that have had a “good crisis” some companies are likely to be over-valued given the likely competition there will be for them.

Alastair Laing is a Partner in the Corporate team.


This note reflects our opinion and views as of 9 September 2020 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.

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