SHAREHOLDER LETTER: Our business in the times of COVID-19 - this glass is ¾ full

08.04.2020

SHAREHOLDER LETTER: Our business in the times of COVID-19 - this glass is ¾ full

by Dirk Markus

These are extraordinary times. Sitting in our home offices, we spend our workdays in Zoom and Webex video conferences, are constantly surrounded by our families and hardly ever leave home. We watch our kids and spend more time with our partners (something we are all coming to appreciate more, I hope). We constantly read Corona-related blogs and newsletters, follow new infection and death rates in various countries and sometimes wonder whether all of this is just a bad dream, and if so, when it will end.

So what does all of this mean for AURELIUS EQUITY Opportunities?

Now it is not gloom and doom all around: Some of our portfolio companies are actually finding this Covid-19 crisis to have a positive impact on their business. While they obviously never hoped for this to happen, Conaxess in Scandinavia is selling record amounts of crisp bread and pasta and Idealworld TV shopping is seeing strong increases in TV viewing and sales in the UK.

How long this will last and when we can hope to return to business-as-usual is, first of all, a medical question and thus very much outside our control. What is important to note, though, is that even if the current extraordinary lock-down restrictions were to continue significantly longer than the six to eight weeks most commentators are currently talking about, this would not capsize the boat! 

The AURELIUS ship is stable as always. AURELIUS Equity Opportunities currently has more than EUR 400 million in cash overall and more than EUR 200 million thereof in non-operating (excess) cash. 

Obviously, for a number of our portfolio companies, these are - as you would expect - testing times. Consumer-oriented businesses in particular are facing the double-whammy of a demand- and supply side shock at the same time. Whether it is 

  • CalumetWex having had to close its shops across Europe; 
  • Transform beauty hospitals in the UK being repurposed by the NHS to treat Covid-19 patients;
  • HanseYachts having to slow down production due to missing parts or
  • Office Depot seeing big corporate accounts lower their orders for office supplies as their employees are working from home;

a number of our portfolio companies are struggling to stay on top of things and deal with dramatic changes in their respective markets. For some companies, the magnitude of change they are experiencing is bigger than what they saw during the financial crisis. While back then, demand in heavily affected sectors such as automotive would temporarily decrease by 30%, this one is bigger with sales at most traditional non-food retail outlets currently effectively at zero.

Over the coming weeks and months, we might have to make difficult decisions for some of our portfolio companies, especially for those that were struggling already before the crisis hit. Each and every loss of a portfolio company is unfortunate but, to a certain extent, part of private equity in general and special situations investing in particular. The management board is closely monitoring the situation across all of our portfolio companies, and we truly want to lead by example and shoulder some of the burden we all have to endure now. To this aim the AURELIUS management board has decided to reduce our total salaries for Q2 2020 by 25%.

Furthermore, a few weeks ago, we initiated a series of measures to fight this crisis. They are designed to

  • protect our people through social distancing in plants and warehouses, disinfection and deep cleaning and working from home wherever possible;
  • protect cash and earnings by systematically reducing capacity, additional cost saving measures and making use of government programs such as short-term work; also, and as communicated in our 2019 annual report, at the annual general meeting to be held on June 18, 2020, we will propose that the full distributable profit for the 2019 financial year be carried forward to new account;
  • protect the portfolio by having our task force team of almost 100 experts work as closely as possible with company management.

For us as investors and M&A professionals, these are and will be times of stress, but equally times of opportunity. When investing, we typically see special situations that fall into one of the following three categories:

  • Strategy-driven special situations are the most common constellation: an owner of a business has strategically decided that it no longer wants to own a certain business. Corporate carve-outs and family succession cases are the most typical deal situations we see falling into this bucket. There typically isn’t a concrete trigger for a disposal other than the current owner perceiving itself as not being the best owner for a certain business or activity. 
  • Earnings-driven special situations are less frequent and typically occur when an owner of a business experiences or expects a subsidiary to cause real earnings dilution, thus triggering a strong urge to sell, often before the end of a fiscal quarter.
  • Liquidity-driven special situations also occur but very occasionally: A seller needs cash as soon as possible and is willing to dispose of assets/subsidiaries quasi over-night.

While strategy-driven special situations are a regular phenomenon, earnings- and even more so liquidity-driven special situations are much rarer. They typically occur only in times of severe market dislocation and create a special window for those brave enough to embrace the opportunity.

North American value investors are already talking about this being a “once-in-a-lifetime” investment opportunity, and I find it hard to disagree. The investment opportunities we will be beginning to see as special situation investors will be bigger than anything we saw during the financial crisis in 2008/2009. And we at AURELIUS are well prepared for this: we have highly qualified people well versed in dealing with difficult situations, cash and the boldness required to invest when times are tough.

So for us at AURELIUS, the current market environment presents a unique opportunity to acquire a collection of businesses that will give us a highly attractive restructuring and exit pipeline for the years to come.

We don’t see the glass as half empty but rather 3/4 full and we are determined to make the best of it! Thank you for your continued support and stay healthy.