Bass, Berry & Sims attorney Scott Reid authored an article for PE Hub offering insight on how sponsors can navigate market-wide shocks that impair the creditworthiness of multiple portfolio companies.
Because macroeconomic policies will continue to tap the breaks of the economy, Scott outlined best practices from previous shocks that sponsors can follow to maintain lender support during this difficult period. Namely, that is sponsors need to be honest with themselves about their portfolio companies’ financial troubles and to plan for decisions about which companies to continue to support through the period of distress.
“Sponsors must be able to quickly and accurately anticipate the fallout, and they must honestly communicate the severity of the situation to lenders,” notes Scott. “This transparency goes a long way in preserving lenders’ trust in the sponsor to manage a market shock.”
When it comes to planning which portfolio companies to support through a market shock, Scott suggests that sponsors should determine how that support will drain available capital commitments of their fund, and that they should “treat a market shock as a time to reaffirm their belief in the original investment thesis for each portfolio company affected by the shock.”
The full article, “How Sponsors Can Anticipate Shocks Affecting Their Portfolio Companies,” was published by PE Hub on October 16 and is available online (subscription required).