Management Consulting

Private equity firms are facing significant challenges in maintaining liquidity amid the economic fallout from COVID-19. As they seek to unlock cash for their portfolio companies, many are overlooking alternative financial tools that could provide immediate relief and support sustainable growth. Aon highlights that only 20% of large corporates utilize credit insurance as a means of accessing funds, leaving a substantial 80% unaware of its potential benefits. Credit insurance can shorten cash conversion cycles, allowing companies to extend payment periods with suppliers and accelerate trade receivables from customers. Additionally, it can replace traditional financial instruments like letters of credit and bank guarantees, thereby positively impacting liquidity. Ergon Capital, for instance, has taken proactive measures by insuring 100% of its companies' receivables. However, they are concerned about the creditworthiness of their suppliers, prompting them to consider reverse factoring. This strategy would enable suppliers to leverage the portfolio company's credit rating for easier access to liquidity, thereby reducing supply chain risk. Furthermore, private equity firms are increasingly recognizing the value of intellectual property (IP) as a critical asset for improving liquidity. Strategies such as patent pruning can free up cash by eliminating the costs associated with maintaining non-core patents. Additionally, using IP as collateral can create new financing opportunities, allowing firms to raise debt without diluting equity. Licensing IP can also generate revenue, with analytics helping to identify potential licensees and secure favorable terms. Rationalizing existing insurance arrangements is another effective method for unlocking cash. By eliminating unnecessary insurance, reducing coverages, and claiming refunds for unused policies, firms can generate additional liquidity. Identifying potential insurance claims related to pandemic losses can further enhance cash flow. In the long term, private equity firms are advised to help their portfolio companies transfer risk away from their balance sheets. This includes ensuring comprehensive business continuity plans and understanding the financial health of suppliers to mitigate supply chain risks. The lessons learned from previous economic crises have informed these strategies, emphasizing the importance of maintaining liquidity without jeopardizing the supply chain or growth potential of the portfolio.