4 months ago
April 2, 2020
A Language Industry Investor’s View on the Coronavirus Crisis
A significant proportion of the language industry is owned by investment funds collectively known as Private Equity. According to an in-depth analysis by Slator, published in November 2019, combined revenues from private-equity backed LSPs weighed in at over USD 1.8bn in 2018. Moreover, private equity-backed LSPs were responsible for more than half of all language industry dealmaking in 2018.
So it matters how Private Equity views the language industry in the context of the current coronavirus crisis, and what steps they are taking to support their LSP portfolio companies.
One such firm is Value4Capital, the backers of Poland-based language service provider Summa Linguae Technologies. The fund says it “specialises in private equity investments in service businesses, looking for opportunities where the service has a strong local delivery component. It focuses on Poland, but selectively invests in Romania, the Baltics, and the other EU member states of central Europe. Owned and managed by its partners, V4C has over 25 years of mid-market private equity experience in the region.”
According to Value4Capital, the fund, which held its first closing in November 2017, benefits from financial backing from the European Union under the European Fund for Strategic Investments (EFSI), set up under the Investment Plan for Europe.
The Polish Growth Fund of Funds (PGFF) is also an indirect investor in the Fund. The PGFF is an initiative created by cooperation between BGK (Bank Gospodarstwa Krajowego in Polish) and the European Investment Fund.
What follows is an interview with V4C Partner Piotr Misztal, who oversees the fund’s investment in Summa Linguae Technologies.
What are your assumptions about the COVID-19 crisis?
The lockdowns which have spread across Europe and the world are disrupting lives and livelihoods. It is now clear that the economic fallout from the virus outbreak is likely to be severe. We are operating under the assumption that most of the global economy will remain disrupted through the next 3–6 months, and that the pick up in activity will be slow, country specific, and sporadic thereafter. This is a very local crisis but transmitted and amplified through global trade linkages.
It is always difficult, in what remains a developing situation, to prepare the portfolio for the economic shock and recessionary conditions that will follow. At V4C, we have tried to focus on the key drivers over which we have some control: the safety of our workforces and the continuity of our businesses.
What immediate measures have you taken?
In these circumstances, our foremost concern has been ensuring the welfare of our own team and our portfolio companies’ workforce. Each company has established a management response team, which has worked to identify and address the issues in their business. With these teams, the companies have implemented work from home whenever possible and enhanced sanitary conditions where physical presence is required.
For our LSP business, Summa Linguae Technologies, this was relatively easy as much can be done remotely and our production teams are used to operating virtually across geographies. As different countries experience the crisis at different times, this gives us both a strength and a risk of more prolonged disruption.
But we also have businesses in the portfolio that are providing essential physical services: our portfolio includes a waste management (that is, garbage collection) business and the largest cash handling company in Poland, ensuring banks and bank machines have cash available.
Both these businesses needed to immediately implement enhanced sanitary procedures, splitting the workforce into separate teams, with strict segregation at the facilities, and taking other measures to ensure continuity. Getting staff to come to work in uncertain conditions was a major challenge for management as the crisis unfolded.
We have encouraged our companies to be clear with their clients about what they are capable of delivering in the current crisis. All our businesses remain open and capable of servicing their clients, but there may be disruptions and delays and this need to be clearly communicated. Be realistic and ensure you are not overpromising.
We encourage our managers to try to understand how the company can help its client by offering, maybe, a new or different service or even adjusted terms.
At the same time, we encourage our managers to try to understand how the company can help its client by offering, maybe, a new or different service or even adjusted terms. People will remember your approach during these times; use the opportunity to deepen the bonds with the client. Summa Linguae has done this by systematically reviewing its clients and projects and reaching out to them to ensure the dialogue remains open.
Isn’t the financial situation of the business the top priority?
Unlike the 2007/8 crisis, banking liquidity for the moment seems to remain available. The issue is the top line as various activities cease and cash inflows morph rapidly.
We have asked all our companies to prepare weekly, direct cash flow forecasts for the remainder of 2020 to focus management on key receivables and payable items, and the conservation of cash. We are reviewing all capital expenditures and encouraging our managers to engage with their suppliers to agree on a flexible approach to both supply and payments.
The 2020 budget you worked so hard on is history.
There is no one-size response, but understanding weekly cash needs, and testing these against various sales scenarios, is key to crafting the right response. The 2020 budget you worked so hard on is history. Everyone needs to start from today and assume a very negative top-line environment for the remainder of the year. If things turn out better, no one will complain.
Of course, we have also reviewed our portfolio to anticipate potential bank covenant issues. If necessary, we will support covenant actions and discussions with lenders. We have discussed with all our companies’ lenders their specific situation and our plan to ensure they weather the crisis. Better your bankers are well informed and supportive now than getting a “Houston, we have a problem” call — by definition, too late.
Are your companies facing employment reduction and redundancies?
We view the crisis as temporary — perhaps not short, but something that will pass. In this context, maintaining the capacity to rebound must also inform short-term decision-making about all the firm’s resources, including people.
We have told our management teams that they must lead from the front. Before layoffs and salary cuts, we expect top managers to make sacrifices in their own compensation. These have been easy conversations as all our top teams are closely aligned with their businesses. We have also told them to be honest and open in their communications with their staff.
We have told our management teams that they must lead from the front. Before layoffs and salary cuts, we expect top managers to make sacrifices in their own compensation.
No one will be surprised there are issues in any business today. Treat the staff as professionals and with respect. They too will have long memories after the crisis. We are not invested in businesses where immediate layoffs or work reduction are required. If they do come, we will decide openly and fairly and do what we can to minimize the impact on our teams.
Can you still think about M&A?
We remain open to opportunities generated by the crisis. We have a strong investor base and the capital to support not only our portfolio but to continue to make new investments. However, in the current environment, our ability to properly assess the risks and diligence of a new investment is significantly constrained.
We have a strong investor base and the capital to support not only our portfolio but to continue to make new investments.
That’s why any short-term deals are likely to be add-ons. Priced realistically, with earn-outs and other structures, we are very much open to discussions. So, we remain in contact with targets and advisers and have encouraged our portfolio companies to be alerted to struggling competitors, which may represent consolidation opportunities as visibility improves.