Like most private equity firms at the start of the year, Millstone Capital Advisors began 2020 feeling optimistic about the manufacturing and restaurant businesses in its portfolio.
Then the coronavirus outbreak began, followed by government-mandated business closures and social distancing measures across much of the U.S. that kneecapped the industries where the St. Louis-based private equity firm invests.
In March, U.S. Census Bureau data showed a worsening outlook for manufacturing activity as new durable goods orders dropped by 14.4%. Meanwhile, the National Restaurant Association also had bad news: 4 in 10 restaurants have closed their doors, some with no hope of reopening. While many restaurant owners have tapped federal relief programs, over 60% said the emergency funding will not enable them to keep all of their employees on payroll.
Millstone’s restaurant businesses, which include the Lion’s Choice and Native Foods chains, are among those that have been impacted. “Like the virus itself, the impact to restaurants is non-discriminating,” says Toby Warticovschi, a partner at Millstone.
Yet even with the pain inflicted on the restaurant industry and many others, the operational and financial support from private equity investors is softening the blow for some businesses in hard-hit industries like restaurants and manufacturing.
“LIKE THE VIRUS ITSELF, THE IMPACT TO RESTAURANTS IS NON-DISCRIMINATING.”
Partner, Millstone Capital Advisors
Warticovschi says firms like Millstone are able to use their partners’ experience to help small businesses. “On their own, they’d be trying to figure it out and they may not be able to,” he says. “Having a partner like us has really helped them navigate this challenging situation with a bit more sophistication.”
In some cases, private equity leaders set up their companies to survive the COVID-19 pandemic by establishing a healthy balance sheet heading into the crisis.
Lincolnshire Management, a private equity firm based in New York that invests across middle-market businesses, says it was able to weather the worst of the coronavirus crisis because of its operational focus and ability to react quickly, as well as its disciplined strategy of buying companies at reasonable multiples and keeping leveraged debt levels low.
“As we sit here today, there are still many unknowns,” says Michael Lyons, Lincolnshire’s president. “When the outbreak began, we said, ‘Let’s assume the worst-case scenario, and then make sure we have ample liquidity to get through that.’”
Despite having to temporarily reduce headcount, furlough some workers and enact production cuts, Lyons says Lincolnshire’s intimate knowledge of each company’s operations—from production and service metrics to human resources and supply chain relationships—has helped the firm.
For many businesses, a steep decline in revenue has required swift cost-cutting measures that can be difficult for owners to make.
“Traditional PE firms are likely to act faster than either multi-generational family-owned businesses, which are too sentimental or nostalgic, or public companies, which are too bureaucratic or political,” says Leonard Levie, chairman and founder of American Industrial Acquisition Corporation, an investment firm based in New York that manages a portfolio of nearly 80 manufacturing businesses globally.
The ability to move quickly is an asset in a business environment that’s changing day by day, as Cleveland-based investor Resilience Capital Partners demonstrated recently.
According to the firm’s co-CEO, Steve Rosen, a portfolio company that makes hoses for municipal fire departments faced a major disruption to production. State-mandated closures forced the company’s suppliers to shutter, cutting off access to parts. In response, Resilience stepped in and quickly found alternative suppliers to keep the company running.
Unprecedented Times, Government Measures
Depending on the industry, the experience and expertise of a business’s private equity partners might not be enough to save it. According to the NRA, the blow to restaurant sales has exceeded the damage in agriculture, ground transportation and spectator sports combined—and government aid might be the industry’s last hope.
Through the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, the U.S. government has earmarked trillions of dollars for relief, including through the Paycheck Protection Program, which offers forgivable loans to eligible small businesses.
Many private equity-backed companies are barred from participating in the PPP based on “affiliation rules” because it categorizes all businesses under a private equity owner as subsidiaries of a single company.
“THE ABILITY TO NAVIGATE AT TIMES LIKE THIS IS REALLY WHERE PRIVATE EQUITY EARNS ITS KEEP.”
Co-CEO, Resilience Capital Partners
In order to maximize the likelihood of securing government aid on behalf of its portfolio companies, Millstone has forgone the automated practices of large banks and shifted its focus to smaller, regional banks that handle cases in person. It has been working with UMB Bank, a regional bank based in Kansas City. “That particular decision made all the difference,” Warticovschi says.
Although the CARES Act sought to rescue businesses, Warticovschi says that not enough funding has been directed to the restaurant and food industries—particularly small and midsize companies—and that the federal government needs to do more. He supports the NRA’s “Blueprint for Recovery,” which the trade group published in March and submitted to lawmakers. The plan would make $240 billion in relief available to the restaurant and food service industries.
Until a Marshall Plan for restaurants is enacted, Millstone is implementing its own programs, including providing food to employees impacted financially by the coronavirus pandemic. The firm is also providing discounts to employees still working, and it’s making donations to St. Louis-area charities, including Operation Food Search, the Urban League and the Jewish Federation.
The unforeseen business challenges caused by the coronavirus outbreak are testing private equity firms and their commitment to their businesses to a greater degree than ever before.
“In good times, we are all so proud of ourselves and we think we’re all so smart and such great investors,” says Rosen. “But the ability to navigate at times like this is really where private equity earns its keep.”
Benjamin Glick is Middle Market Growth’s associate editor.