Navigating the Market During the Covid—19 Crisis and Beyond

In the current environment, public companies are following similar playbooks to preserve cash and position themselves for long-term success. Their actions offer some lessons for private and family owned businesses struggling in the current environment.  In the great recession, quick decisive action was critical for companies to survive the downturn and thrive in the recovery.  At Keene Advisors, we expect quick decisive action to be critical for companies in this environment too. 

Public companies, executives and Boards are taking decisive action, including to:

1.      Maximize liquidity

a.      Drawing down on their revolving credit facilities

b.      Temporarily pausing share repurchase programs

c.      Pursuing divestitures of non-core assets

d.      Considering changes to dividend policies

e.      Extending trade payables

f.       Accelerating collection of receivables and liquidation of inventory

2.      Reduce costs

a.      Cutting executive compensation and/or discretionary compensation

b.      Cutting Board of Directors cash retainers / compensation

c.      Closing offices, retail stores, distribution centers, etc.

d.      Furloughing or laying-off employees

3.      Develop processes and procedures to keep employees safe

a.      Implementing processes and procedures to promote social distancing

b.      Implementing remote work and telecommuting programs

c.      Increasing direct employee communications

d.      Providing additional PTO

4.      Develop new solutions and delivery methods for customers

a.      Developing alternative distribution models to meet customers emerging needs and promote healthy and safe interactions between customers and employees

b.      Adding additional customer support (call centers, etc.)

5.      Others

a.      Rescheduling investor meetings

b.      Eliminating forward guidance

c.      Updating risk disclosures

d.      Announcing donations to charities

If the market downturn is protracted, public companies will likely pursue more dramatic measures, including:

1.      Debt relief

a.   Pursuing waivers for covenant violations

b.   Amending credit agreements and bond indentures agreements

c.   Extending maturities of existing debt

d.   Tendering for debt trading at a discount

2.      Deleveraging

a.   Raising equity from new investors (registered offerings, PIPEs, etc.)

b.   Selling non-core assets and businesses

3.      Strategic mergers and acquisitions

a.   Merging with or acquiring competitors to gain efficiencies of scale, rationalize expenses, etc.

b.   Merging with companies with stronger a balance sheet to secure liquidity and access to capital

4.      Sale transaction

a.   Sell to a larger, better capitalized company to preserve value for stakeholders

5.      Out-of-court restructuring

a.   Negotiating deals / workout among creditors and the company typically utilizing exchange offers, rights offerings and other tools

6.      Bankruptcy – Chapter 11 and Chapter 7

a.   Plan of Reorganization

b.   Section 363 Sale Process

As the economy begins to recover, companies will begin exploring strategies to grow and enhance value for stakeholders, including:

1.      Raising growth capital

a.      Raising junior capital (debt and equity) to capitalize on organic and acquisition-driven market opportunities

2.      Strategic acquisitions

a.      Acquiring competitors to gain market share and accelerate growth

3.      Returning capital to shareholders

a.      Reinstating / initiating share buybacks to capitalize on lower prices

b.      Reinstating / increasing dividends

Our team at Keene Advisors combines investment banking, consulting and operating experience to help you navigate strategies through any economic environment or business cycle.  If you would like to discuss how COVID-19 is impacting your business and how to position your company to thrive, please contact us at 617-765-2054 or Info@KeeneAdvisors.com.

Bills and Passions

While in college, I had two types of jobs, passion jobs and bills jobs. My passion jobs orbited around the voluntary sector and reflected my personal interests: quality of and accessibility to education, social justice, advocacy research… Sometimes paid and sometimes not, these experiences were always fulfilling; should someone ask me the ubiquitous “what do you do?” question, I would always answer with my passion job. My pay-the-bills jobs, on the other hand, gravitated towards the menial and uninspiring, but served an indispensable self-evident purpose. Ultimately, each taught me valuable lessons and opened the doors to opportunities I could have never imagined. Most importantly, they helped me understand which sort of career I wanted and needed after graduation. The only problem was that the wanted and the needed seemed irreconcilable.

What I wanted was to make a difference. What I needed was to make money. Given my educational and professional background, I felt confident I could achieve either, but the dynamics of the non- and for-profit sectors made it unlikely that I could manage both. My initial compromise consisted of a full-time bills job supplemented by personal volunteering and charitable contributions. This was a temporary relief, but when I learned that nearly 70% of employees in the US are either disengaged or actively disengaged in their job, I became worried again. The difficulty of negotiating my values with the culture of corporate America and the financial needs of a recent graduate fueled the beginnings of a quarter-life crisis.

Any Millennial who researches their options, striving to stay out of that 70% of disengaged employees, will came across ominous statistics but some may also provide solace. They may learn they are not alone: in the US, 94% of Millennials like using their skills to benefit a cause. Around the world, 87% of Millennials believe that the success of a business cannot be measured only by its financial performance, but 64% think businesses are focused solely on their own agenda at the expense of the wider society. As many as 56% of Millennials worldwide have ruled out working for an organization because of its values. As I weighed my options, it became apparent that my problem was not just my problem; it was my entire generation’s problem. What is the Millennial job-seeker to do?

In B Corps, I found my answer. B Corps are companies that focus both on profits and the public good; Kickstarter, Patagonia, and Ben & Jerry’s are prominent examples. According to B Lab, the third party nonprofit that grants the B Corp certification, “B Corps are for-profit companies [that] meet rigorous standards of social and environmental performance, accountability, and transparency.” Under this framework, people have come together at over 1,500 companies to use business for good. Today, I am proud to count myself among them.

Working at a B Corp has bridged the gap between bills and passion jobs. Rather than check my values at the door when I get to work, I can magnify my impact by collaborating with like-minded colleagues. In the investment banking industry, this can be quite substantial. Indeed, if three of the independent investment banks had given 5% of their 2014 revenue to the Against Malaria Foundation, they could have saved over 25,000 lives in a single year. Knowing this, our purpose is not just to help our clients achieve long-term success, but also to have a positive, lasting impact on the world. This sense of meaning provides satisfaction beyond a salary and drives true engagement and fulfillment.

Millennials like myself have been telling employers that we want to make both a living and a difference. As we become a larger part of both the consumer and employee pool, employers cannot help but to listen. B Corps are one of the ways in which they have responded, and thanks to this dialogue, businesses are treading a more compassionate path today. Across generations, we are growing increasingly conscious of our shared responsibilities, and in the process, we are dismantling the false dilemma that made us chose between money and purpose.

—

Sergio Reyes is a Millennial working at Keene Advisors, a socially responsible investment bank located in Newton, MA.

Can Private Equity Help Make Business Good?

One of the World’s Leading Investors Backs a Benefit Corporation

In October, Laureate Education, an international for-profit campus-based and online university education provider, announced its intention to become the largest publicly traded benefit corporation in the United States.  Benefit corporations are companies that incorporate a positive impact on society or the environment as part of their legally defined goal.  The announcement that Laureate intends to become the largest publicly traded benefit corporation is especially significant because Laureate is owned by KKR, one of the largest and most successful private equity firms in the world.  KKR was one of the chief innovators of the leveraged buyout in the 1980’s and is now pioneering a new kind of investment - investing in a company that wants to generate attractive returns for shareholders and also do good in the world.  If the Laureate IPO is successful, it will provide a roadmap for institutional investors, family offices and individual investors that want to invest capital in businesses that generate a good return and make valuable contributions to society at large.  And it will provide a strong counterpoint to skeptics that believe that businesses cannot access institutional capital unless they focus exclusively on “maximizing value” for shareholders.

Benefit corporations are reimagining the way that business is done by fundamentally redefining what it means to be successful.  The benefit corporation ideology, “people using business as a force for good,” seeks to align shareholder and other stakeholder incentives to promote successful, sustainable business.  The benefit corporation movement, started in 2006, has been characterized by the likes of Patagonia, Ben & Jerry’s, Warby Parker, and The Honest Company to name a few. The number of certified benefit corporations is growing rapidly, increasing by 50% since May 2014 to over 1,575 today.  It includes companies across 130 industries and in 42 countries.  The benefit corporation community boasts impressive statistics from their member companies, ranging from sustainability metrics, to employee benefits, to women and minorities in management positions. However, public companies represent a small portion of the benefit corporation movement today, and there has been skepticism about whether benefit corporations make viable public companies (NYTimes, Fortune).  In the United States, several public companies have subsidiaries that have become certified benefit corporations.  Plum Organics, a subsidiary of Campbell’s Soup, incorporated as a benefit corporation in 2013 under Campbell’s leadership.  Ben & Jerry’s, which was acquired by Unilever in 2001 has been a leading benefit corporation since 2012.  In Brazil, Natura, the country’s leading cosmetic company became the largest and the world’s first public benefit corporation.  And in Europe, Unilever, which is the 3rd largest consumer products company in the world, is exploring becoming benefit corporation.

Access to traditional institutional capital in the United States, both public and private, could unleash the benefit corporation movement and cause a fundamental change in the global economy by making business more sustainable and better aligning businesses with the environment, their employees, their communities and ultimately their customers.  As more companies become benefit corporations and more capital providers learn about the incredible power of benefit corporations, capital will flow into the sector.  KKR could be just the tip of the iceberg.

The news that Laureate Education intends to become the largest publicly traded benefit corporation in the U.S. demonstrates that the benefit corporation movement is getting closer to reaching the critical mass needed to bring traditional investment capital to bear for other benefit corporations.  Once again, KKR has positioned itself to be a leader in financial markets.  This transaction is particularly important as it will serve as a precedent for other benefit corporation transactions in the future.  It will be heavily scrutinized and the merits of the benefit corporation movement will be tested; however, I am optimistic that it will be successful and that the benefit corporation movement will continue to grow and flourish.