Management Consulting
Aon
Full Credential Description
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 serves as a case in point, having insured 100% of its companies' receivables. The firm is also exploring reverse factoring to mitigate supply chain risks, allowing suppliers to benefit from the credit ratings of portfolio companies, thus improving their access to liquidity. This strategic approach not only addresses immediate cash flow concerns but also positions the firm to better manage long-term supplier creditworthiness. Furthermore, private equity firms are increasingly recognizing the value of intellectual property (IP) as a critical asset in enhancing 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, enabling firms to raise debt without diluting equity. Licensing IP can also generate revenue, with analytics helping to identify potential licensees and optimize licensing terms. Rationalizing existing insurance arrangements is another effective method for unlocking cash. By eliminating unnecessary coverages and identifying potential claims related to pandemic losses, firms can generate additional liquidity. A comprehensive business continuity plan and a resilient technology infrastructure are essential for long-term risk management, particularly in reducing supply chain vulnerabilities. Overall, the lessons learned from past economic crises have informed the liquidity management strategies of private equity firms during the current downturn. For instance, Equistone has prioritized proactive engagement with insurers and banks to support its portfolio companies, while DeA Capital has focused on avoiding additional leverage in its quest for liquidity. By employing these tailored solutions, private equity firms can enhance their liquidity without jeopardizing their supply chains or growth potential.