Coronavirus & the New American Economy: Predictions From a Black Private Equity Investor
The face of the American economy is forever changed by this coronavirus pandemic. In three weeks’ time we’ve witnessed financially viable companies go into rapid free fall by the millions, starting with employees and trickling rapidly. Small to mid-sized businesses are laying off in record numbers, and there is no clear end in sight. With the spread of the coronavirus, people are being asked to choose between their livelihoods and their very lives. Businesses are pairing down to “skeleton crews,” keeping just enough workers on board to get by and doubling remaining employees’ duties. Never before have we realized just how interconnected we all are in our quest for survival.
Although so many are in the same boat, businesses that prided themselves on having a good credit standing will now find it more difficult to negotiate lines of credit or to have contracts and lines of credit re-instated once things begin to normalize, save for some debt forgiveness programs and financial incentives being granted through the federal government’s CARE Act.
The late Jack Welch, who held the position of chairman and CEO of General Electric, worked hard to eliminate bureaucracy and increase growth for General Electric. He was known for firing unproductive managers and eliminating whole divisions within his company, and then acquiring other companies and driving them to better management and increased profits—a true master of corporate structuring. Warren Buffett, as chairman and CEO of Berkshire Hathaway, has built his fortune not investing in companies, but investing in management teams.
Welch was once quoted as saying, “This whole game of business revolves around one thing. You build the best team, you win.”
This quote may sound overly simplistic during such uncertain times, but I can break down how it applies to all of us, the future of our financial health, and our economy. The America we once knew is forever changed. I believe hundreds of thousands of businesses will be lost throughout the United States. I further believe and estimate that certain industries will become obsolete, however, new ones will be created.
There are certain industries that thrive in tough times, perhaps due to some of the foils of human nature. Let’s first take note of these. Companies that will thrive during this pandemic will most likely be within real estate (investors and would-be investors love a buyer’s market), liquor and tobacco sales, firearms sales, streaming entertainment, sectors of law that deal in financial hardship (think bankruptcies and foreclosures), virtual meeting software, healthcare, and banking.
The last one may shock you. You might be wondering, “If people can’t make their payments, how can banks thrive?” As someone who has built a career on obtaining capital for businesses and bringing businesses public, overseeing mergers and acquisitions, and investing as a private equity investor in many companies, I can tell you that, much like casinos, “the house always wins.” Banks come out on top because they are brilliant at transmuting and consolidating, and when all else fails either calling in loans or bundling and selling them to Wall Street. In the coming six months to a year, you will see banks call the loans that appear to be weaker bets and extend new loans to much stronger companies. Therefore, companies with weaker margins will find it harder to survive in the climate that is to come, but companies with solid margins and strong infrastructure will grow in strength at the end of the coronavirus bell curve.
Conversely, industries like travel, hospitality, brick and mortar retail, brick and mortar consumer services, locally driven services that require face-to-face social interaction, and manufacturing will suffer the most during this time. Apart from necessities like food, medication, and certain sundries, consumers are now buying less goods and services as their financial insecurity and anxiety grow along with massive loss of income.
As of April 2, a record 6.6 million Americans filed for unemployment—an unprecedented figure. This a fertile ground for private equity investors, hedge funds, and venture capitalists to reap the benefits of undervalued assets. This can create a huge opportunity for private equity investors, venture capitalist firms, and hedge funds. They can boost the economy by investing their monies into struggling and failing businesses and gaining a substantial stake in new and emerging industries.
Many businesses that rely on self-financing or “self-funding” will begin to falter as personal financing dries up. In addition, many Americans will be scaling down the brands they have always used. Chain stores and large franchise stores will have a better chance of making it through this storm. We are going to be looking at a new world and a new economy in a way that our country has not experienced since the 1930s.
The good news is, we will witness the birth and growth of emerging industries, as this decade and century progress, much like the horse and buggy gave way to an automotive industry. Companies will be able to work more efficiently due to A.I. and robot technology. There will be a significant streamlining of support staff, while mathematic, scientific, and maintenance staff will be needed to service artificial intelligence and robotics-based devices.
China’s economy has also impacted our world in ways that the average American is not directly aware of. We owe China what seems like an insurmountable debt, a byproduct of the Great Recession of the late 2000s. During this time, China bought up a great deal of American debt. I do think, because of the coronavirus outbreak, our federal government stands to renegotiate its debt with China. Our leverage point is that the United States economy cannot collapse, because we are the largest economy in the world and every other economy is dependent upon it.
HOW WE BRACE FOR FINANCIAL IMPACT AND MINIMIZE THE FALLOUT
Communicate with Your Creditors and Debtors
Explain where your company is at, discuss options, and renegotiate terms if you can. Inquire about extensions on payment terms, and request waivers of late fees and penalties. The good news is that you are not alone. Tens of millions of people are currently in the same boat and your creditors know that. In many ways, this puts you in the driver’s seat to renegotiate payment terms and obtain some forgiveness on penalties that would normally be imposed. At the same time, communicate with your company’s debtors and diligently collect monies owed to you. Be prepared to negotiate with customers and accounts who owe you money.
Reach out to the current customers you do business with to gauge where they are at. Offer discounts and other payment incentives to get whatever liquid money you can up front. For example, if a customer owes an outstanding balance of $1,000, make them an offer to pay you $700 now to settle the account. This will give you much needed cash in hand. Regarding new sales, companies should be all about solving customers’ pain points right now.
Identify Pain Points and Solve Them
Identify your customer or client “pain points” during this time and strategize ways to solve them in a way that could potentially make you indispensable during a time when most products and services will be cut from the equation. Whether that is free delivery, discount packages, future incentive packages, extra services, or penalty-free rescheduling, the old playbook no longer applies. Become flexible in your approach. If you are able, extend more favorable payment terms to gain more market share within your industry.
Form Strategic Alliances
Companies should also look to industries that are thriving and communicate their desire to align and/or partner with other companies to leverage profitability, innovation, and market share. Seek out companies that offer complementary products or services and reach out to see how you can help one another. We are living through times where people are more emotionally receptive because no matter what industry you are currently in, we are all feeling vulnerable right now. Entering into a strategic partnership with another company could mean selling a part of your company or even acquiring part of another company. A partner may have the ability to loan you capital in exchange for equity in your company. It could mean extending a sweetheart deal on something that you usually don’t offer such favorable terms on. These ideas should be discussed with a mutual respect and understanding of your respective industries, needs, and goals and the current marketplace in which you are operating.
A few types of partnerships:
- Joint Venture – If you decide to merge with another business in your industry to combine assets and resources, you are going to need to consolidate and cut costs. For example, Company A may have a stronger sales team, but Company B has a better administrative team. You would consolidate those resources, keeping Company A’s sales force and Company B’s administrative team. We cut costs down because we are working together and trimmed the fat. One of the most strategic partnerships that need to take place right now.
- Equity Investment – A private equity investor comes in and either loans you capital or invests capital into your company. This means that you are loaned money in exchange for equity in your company. A private equity investor may extend you a line of credit to help you survive this climate. You don’t pay back an equity investment in traditional terms, but you will find your ownership stake shrinking, perhaps considerably. The good news is that the equity investment would likely outweigh the loss. One thing to consider during economic downturns is that private equity investors will look for terms that favor their investment. This is because the higher the risk for the investor, the more that investor is exposed financially, the more the terms will be slanted to cover that risk.
- Acquisition – Getting acquired by a larger business that has the financial wherewithal to support your business and keep operations afloat during this period of time places a strong bandage on the current uncertain marketplace. This means you will not be in such dire need of immediate profits to stay alive or to plan the future trajectory of your business. You can also maintain your marketing and advertising efforts and continue to grow your market share without immediate profits, but with the future projection of profits.
Streamline Efforts with Technology and Outsourcing
Can I have my workforce work remotely? Can I outsource my marketing and advertising team? Can I streamline my administrative tasks with technology or keep my workforce intact but teach them how to be more efficient with the use of technology? These are some of the questions to ask yourself during this time. You may find out through an efficiency audit of your business that 20% of your workforce is doing 80% of the work. With that information, you can pivot your efforts and infrastructure accordingly. This is an opportunity to become more efficient and more profitable in the long run.
Keep Your Eye on Fall 2020
Companies can use the spring and summer months to position themselves for an autumn boom, if they take the right strategic steps.
The financial effects of coronavirus will be felt long after the pandemic is under control. We will feel ripples and aftershocks well into 2021 and perhaps throughout this decade. This means that business as usual is a losing proposition. Our economy will recover, albeit with a different spin than before. We will see a rise in consciousness about the way humans treat and consume animals, and we will begin to shift toward more of a cause and effect mentality. This means that industries that exploit animals for profit will begin to recede. Virtual networking and virtual meetings will become more and more commonplace, and the traditional sales meeting or boardroom meeting will happen less. We will also come back together and socialize in slightly different yet distinctive ways, with a return to more community-based activities. Local parks, places of worship, board games, and general fellowship with one another will be newly discovered and offer a newfound charm.
Employers will also become more accommodating of remote workers and flexible schedules, and will be more accommodating to sick leave and other dispensations that support employees’ health and well-being.
People will continue to seek out financing, but banks will be less inclined to offer loans for things like payroll, and more eager to finance investments in robotics, A.I., and other technology-related ventures. New industries will be born and created, and we will see a massive acceleration of A.I. and automation across most industries.
Solomon RC Ali scales profitable companies across healthcare, technology, and energy sectors through the acquisition of funding and management consulting. Mr. Ali and his team of consultants have collectively managed and successfully closed more than 140 mergers and acquisitions and arranged more than $250 million in structured investment capital and financing.
In addition, Mr. Ali is CEO of NDR Energy Group, one of the largest minority-owned energy companies in the United States, and CEO of Revolutionary Concepts, which owns multiple technology patents, licensed by smart home companies including Ring (owned by Amazon) and SkyBell.
Mr. Ali is currently host of the podcast, MBA: Minority Business Access. Visit SolomonRCAli.info.