Here are the hard numbers:
– 189,000 confirmed cases of infections as of the 16th March 2020
– 7,500 deaths
– 80, 000 recoveries
In South Africa, there are 62 confirmed cases that we know about. I expect that as we roll-out testing & implement a culture of workplace detection, these numbers will increase drastically over the next few weeks.
But the cost to the economy has been even more dire. A recent Bloomberg Politics study estimated a global economic wealth erosion of $2.7trn on the narrow band. I expect that this is going to wipe-out the portfolio returns of many funds and leave in its wake the destruction of many private equity funds.
That notwithstanding, my PE fund Watermark Capital Partners are actively looking at the bargains that will soon hit the shelves following this fallout. Make no mistake, this crisis will leave the balance sheets of many good businesses absolutely destroyed. Where there is uncertainty & panic, there is always an opportunity.
My main concern is the speed at which news about this virus & its economic impact is being disseminated & how those news are affecting market sentiment. I have seen with some of our portfolio companies’ requests from their CFOs to conserve cash rather than allow a capital call to the treasury.
This erosion of consumer demand will cause market panic & force big businesses to halt spending. My sources tell me that credit departments in many of our banks are already working on their models & stress-testing their liquidity ratios so that they can strengthen their criteria. This is after the National Treasury and StatsSA declared that South Africa is in a recession. My view, we’ve had a real recession for a year preceding this announcement.
I expect that these latest events will cause a dramatic increase in delinquencies and a subsequent rise in unemployment.
Credit markets will dry-up over the next 2 quarters. Whilst I expect the government will introduce a fiscal stimulation program, I don’t expect that this will have an impact on the real economy in the short-term. Most small businesses simply do not have the balance sheets to ride out this wave of chaos. Conserving cash and being prudent with your spending is your best bet.
2. Customer insights are king
Stop spending time in your office holding endless meetings and hit the pavements. Go visit with your customers (of course maintain the social distancing of 1.5 meters) and understand where their mindset is & how the virus is affecting their business and their spending. Proximity to the customer will be your greatest ally.
3. Credit now, not later
If you can access a short-term debt facility now, then do it. A short term facility like an overdraft will help you smoothen the bumps of this cash crunch that’s coming. Do not be reckless with the facility. Make sure that you cut costs & only have the essentials running through your P&L. Print your Income Statement and run through each of your costs meticulously. Leave no stone unturned while trying to minimise costs.
This credit should buy you another month or two in the runway.
Side-note: it is highly likely that your suppliers will call-in or reduce their credit lines to you. Do not expect this to be a reliable source of funding over this period.
Talk to your people around the risks of the virus. Talk to them about the concerns you have around the short-term financial sustainability of your business and the potential implications on jobs and job security. This is a fantastic opportunity to get your people to understand the urgency of improving their productivity rates and increasing the rate of ownership and customer satisfaction.
Also, talk to them about managing hygiene & make sure they have the materials to do so.
Offer your people the opportunity to work a different schedule of hours owing to the risk of a crowded public transport system.
5. Communicate. Communicate. Communicate.
Draft a statement about the things you are doing to “Corona-proof” your business and send it to your customers, your suppliers, and your stakeholders. You have to get ahead of the curve & communicate upfront. You do not want uncertainty, doubt & panic to manifest in your customers or your staff.
I hope these tips help you during this difficult time.
I will continue to lobby those to make sure that we have the best response that protects the economy, protects jobs & protects the most vulnerable, small business owners.
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