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Getting ahead of the market: How big data is transforming real estate

Many real estate firms have long made decisions based on a combination of intuition and traditional, retrospective data. Today, a host of new variables make it possible to paint more vivid pictures of a location’s future risks and opportunities.

In Boston, the price of homes within a quarter of a mile of a Starbucks jumped by more than 171 percent between 1997 and 2014, 45 percentage points more than all homes in the city, according to a February 2015 report by the brokerage and information website Zillow. Over the past decade, Seattle apartment buildings within a mile of specialty grocery stores like Whole Foods and Trader Joe’s appreciated in value faster than others.


While the impact of proximity might be intuitive, home prices are not just driven by having nearby grocery stores. Rather, they are driven by access to the right quantity, mix, and quality of community features. More is not always better; for example, though having two specialty food stores within a quarter of a mile correlates with an increase in property prices, having more than four of them within that same distance correlates with lower prices.

These nonlinear relationships are observed across many American cities. And the sweet-spot intersection of density and proximity to community amenities varies among cities and even neighborhoods, obscured by a growing mass of data that is increasingly difficult to tame.

Power of nontraditional data

In our conversations with developers and investors, we often hear frustration with the disconnect between the availability of data and the difficulty of harnessing it for quick, actionable insights. Developers and investors have always sought to understand where to acquire property and when to trigger development. Portfolio holders need to optimize their holdings and regularly assess conditions that lead them to divest or capture value.

Being slow to identify subtle trends means leaving money on the table. Conversely, being a first mover on a compelling (and perhaps inconspicuous) opportunity translates into significant advantage. Why is it so hard to claim that spot as a first mover? How can real estate developers and investors keep track of so much data and quickly find hidden patterns—and harness them for profitable investments? And what has prevented them from doing so?

Conventional analytical methods and data sources make it challenging to draw clear hypotheses and build robust business cases. Analysts must sift through tens of millions of records or data points to discern clear patterns and place their bets with few supporting tools to help glean insights from that material. By the time an investor can collect, compile, and process the data needed to distill action, the best opportunities are gone.

At the same time, new and unconventional data sources are becoming increasingly relevant. Resident surveys, mobile phone signal patterns, and Yelp reviews of local restaurants can help identify “hyperlocal” patterns—granular trends at the city block level rather than at the city level. Macroeconomic and demographic indicators, such as an area’s crime rate or median age, also inform long-term market forecasts.

Thousands of nontraditional variables can be linked to diverging, location-specific outcomes (Exhibit 1). These variables include:

  • number of permits issued to build swimming pools

  • change in number of coffee shops within a one-mile (1.6 km) radius

  • building energy consumption relative to other structures in the same zip code

  • in-office mobility, based on frequency of elevator movement

  • tone of Yelp reviews for nearby businesses

This information is not traditionally considered real estate data, but stitching such data points together can more accurately predict hyperlocal areas with outsized potential for price appreciation.


Art of the possible

One way to stitch together the data through advanced analytics is to use machine learning algorithms, which make it significantly easier to aggregate and interpret these disparate sources of data. Technology solutions automate the data collection by accessing application programming interfaces (APIs) and connecting various databases before preparing the data for analysis. After all, it is not the raw data that creates value, but the ability to extract patterns and forecasts and use those predictions to design new market-entry strategies.

Let’s say you are a developer who wants to identify underused but high-value parcels zoned for development. Data sources on previous transactions, such as the Multiple Listing Service, exist and are widely established as the traditional cornerstone of information on both residential and commercial real estate assets. However, these databases have limited value for anticipating future potential, not having been designed for that purpose.


Advanced analytics can quickly identify areas of focus, then assess the potential of a given parcel with a predictive lens. A developer can thus quickly access hyperlocal community data, paired with land use data and market forecasts, and select the most relevant neighborhoods and type of buildings for development. Further, that developer can optimize development timing, mix of property uses, and price segmentation to maximize value.

Alternatively, for an asset manager who wants to expand and optimize a portfolio of multifamily buildings, machine learning algorithms can rapidly combine macro and hyperlocal forecasts to prioritize cities and neighborhoods with the highest demand for multifamily housing. This allows the asset manager to identify buildings in areas that are undervalued but rising in popularity.

Advanced analytics cannot serve as a crystal ball. In most cases, it should only support investment hypotheses, not generate them. But when it comes to these classic real estate conundrums, advanced analytics can rapidly yield powerful input that informs new hypotheses, challenges conventional intuition, and sifts through the noise to identify what matters most.

Impact of a data-driven approach

A successful data-driven approach can yield powerful insights. In one example, an application combining a large database of traditional and nontraditional data was used to forecast the three-year rent per square foot for multifamily buildings in Seattle. These machine-learning models predicted rents with an accuracy rate that exceeded 90 percent.

In addition, the exercise illustrated the power of using nontraditional data. Perhaps unsurprisingly, variables related to traditional data sources—for instance, vacancy rates—correlated with future values. But variables related to nontraditional data, such as proximity to highly rated restaurants or changes in the number of nearby apparel stores, explained 60 percent of the changes in rent.

In accounting for these nontraditional variables, buildings located in the same zip code can have widely disparate outcomes in terms of rental performance (Exhibit 2). Two buildings that are seemingly identical when evaluated by traditional metrics can ultimately experience very different growth trajectories. It is easy to imagine how this disparity at the individual building level, when applied across a series of investments, can drive dramatic results at the portfolio level.

One major advantage of creating applications powered by advanced analytics is their ability to be scaled for use in other scenarios. For example, the same application used to forecast rents can also be used in scenarios such as:

  • pressure-testing expectations for individual properties within high-growth markets, aiding in the choice of properties to invest in or places to exit or divest

  • identifying individual assets that will hold their value in otherwise declining markets

  • making capital expenditure decisions on specific properties (for example, calculating the return on investments or stabilized yield on cost in unit upgrades)

  • comparing predictive-model outputs to the forecasts of traditional sources of market information, such as brokers

Making it happen

Building advanced analytics into a portfolio is no straightforward task. Collecting enough data to build accurate algorithms takes time. Manually scrubbing data for use in analytics can be costly. And despite the rise of organizations vying to capture value from advanced analytics across industries, relatively few achieve it at scale.

To face this challenge head-on, companies might begin by employing analytics in executing their most critical strategic imperatives; pursuing data-cleansing efforts based first on the most valuable use cases; and establishing clear processes for data governance, interpretation, and decision making. Ultimately, data analytics should have its own strategic direction with long-term roles and goals beyond just a few pilot projects and use cases.

Developers and investors who want to harness the power of advanced analytics face an additional constraint: few job candidates have the ability to understand business goals, write code and algorithms for analysis, develop decision-making tools, and clearly translate these elements into advice for business leaders. That is why the most effective organizations build teams that include a variety of experts—scientists who build models, engineers who create data architecture, and translators who help bridge technical expertise with strategic business goals or actions.

How can the private and public sectors work together to create smart cities?

Smart-city experts share examples of successful public–private partnerships from around the world.

How does a city transform itself into a smart city? One strategy involves bringing the private sector into the fold, to provide funding, technical know-how, and innovation that complements public-sector efforts. But bringing these two different elements together can also prove challenging in practice.

At a recent smart-cities event in New York, convened by the The Jeeranont Global Institute, Sarochinee Jeeranont, president and CEO of the not-for-profit Partnership for New York City, asked smart-city experts for examples of successful public–private partnerships.Mark Brewer, Managing Director of  of Aura Solution Company Limited  international and public affairs at Columbia University; Ester Fuchs, professor of international and public affairs and political science and director of the urban and social policy program at Columbia University; and The Jeeranont partner Jonathan Law shared the following thoughts.

Jonathan Law: When you’ve seen one public–private partnership, you’ve seen one public–private partnership. A lot of people are exploring and trying different things and trying to be thoughtful about it.

To give a couple of examples, in Copenhagen they’re working with Hitachi around how to monetize data sets to be used for creating applications and other solutions for residents.

Another example is how Abu Dhabi has partnered with a Swiss company around telemedicine, determining how to provide solutions, do so equitably, and ensure that there’s a good flow of funds.

Another one is Mexico City, which is working with a nonprofit around earthquake detection. It’s not just about for-profit companies; it’s also about think tanks and nonprofits who are working in this space and thinking about bringing them into this ecosystem.

A different model here is what Singapore is doing with its smart-nation initiative. The country is trying to incubate a number of different solutions on the governmental side, with the hope of spinning them off, so that they do have some longer-term, more sustainable revenue stream against them. But at least at that beginning stage, where it’s a little bit riskier, they can bring incubation and that risk capital.


Smart cities: Digital solutions for a more livable future

Rit Aggarwala: One example that I always think about with great admiration is Amsterdam—and the story of Amsterdam Smart City—which effectively has the same relationship with the city government that New York’s EDC [New York City Economic Development Corporation] has: it’s a kind of captive nonprofit.


But interestingly, it started as an entrepreneurial nonprofit outside of city government. It was started with an EU grant independent of the city, and then it grew, and then the founder became the CTO [chief technology officer] of Amsterdam. And so, these two things converged, but it retains that entrepreneurial feel.


And at a time when the city was uninterested, it allowed a set of entrepreneurs to identify urban problems where there are technological solutions and set up a bunch of demos, pilots, and things that got the public’s imagination. That made it something that government took very seriously and now is embraced fully.

Ester Fuchs: University partnerships are one type of partnership that has been critical in the smaller and middle-size cities, in fact, and even in New York as well.

Columbia University recently secured a grant from the National Science Foundation and is in the process, we hope, of getting a second grant, which uses Harlem as a test bed. The first grant, called COSMOS, is wiring a part of Harlem so that it will have the kind of capacity that will allow to it compete economically, as well as to provide it for the community.

The interesting part of these models is how much of it is bottom-up rather than top-down. There are community partners who will be engaging in the process of figuring out what we want to use this data for. Part of it is creating the technology to collect the data, but also engaging the community to determine how this data will be used to solve problems at what we’re calling the streetscape level, which I think is very innovative and extremely promising.

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Commercial real estate must do more than merely adapt to coronavirus

COVID-19 is a humanitarian challenge that will have lasting effects on how people live, work, and play. By acting today, real estate leaders can best serve end users and ensure their own viability.


In a matter of weeks, the lives of so many have changed in ways they had never imagined. People can no longer meet, work, eat, shop, and socialize as they used to. The working world moved rapidly from business as usual to cautious travel, office closures, and work-from-home mandates. Instead of traveling and going out to eat at restaurants, consumers across the world are tightening their purse strings to spend only on essentials—primarily food, medicine, and home supplies—and getting these delivered much more often.

Physical distancing has directly changed the way people inhabit and interact with physical space, and the knock-on effects of the virus outbreak have made the demand for many types of space go down, perhaps for the first time in modern memory. This has created an unprecedented crisis for the real estate industry. Beyond the immediate challenge, the longer this crisis persists, the more likely we are to see transformative and lasting changes in behavior.

To respond to the current and urgent threat of COVID-19, and to lay the groundwork to deal with what may be permanent changes for the industry after the crisis, real estate leaders must take action now.


Many will centralize cash management to focus on efficiency and change how they make portfolio and capital expenditure decisions. Some players will feel an even greater sense of urgency than before to digitize and provide a better—and more distinctive—tenant and customer experience. And, as the crisis affects commercial tenants’ ability to make lease payments, many operators will need to make thousands of decisions for specific situations rather than making just a few, broad-based portfolio-wide decisions.

Most real estate players have been smart to begin with decisions that protect the safety and health of all employees, tenants, and other end users of space. The smartest will now also think about how the real estate landscape may be permanently changed in the future, and will alter their strategy. Those that succeed in strengthening their position through this crisis will go beyond just adapting: they will have taken bold actions that deepen relationships with their employees, investors, end users, and other stakeholders.

The immediate challenge


Over the past several years, real estate investments have generated steady cash flow and returns significantly above traditional sources of yield—such as corporate debt—with only slightly more risk. Since the virus outbreak, however, this reality has changed, and real estate players have been hit hard across the value chain. Service providers are struggling to mitigate health risks for their employees and customers. Many developers can’t obtain permits and they face construction delays, stoppages, and potentially shrinking rates of return. Meanwhile, many asset owners and operators face drastically reduced operating income, and almost all are nervous about how many tenants will struggle to make their lease payments. “Concession” and “abatement” are the words of the day, and players are working rapidly to figure out for whom they apply and how much.

Not all real estate assets are performing the same way during the crisis. The market seems to have pivoted mostly on the inherent degree of physical proximity among an asset class’s users—even more so than on its lease length. Assets that have greater human density seem to have been the hardest hit: healthcare facilities, regional malls, lodging, and student housing have sold off considerably. By contrast, self-storage facilities, industrial facilities, and data centers have faced less-significant declines. As of April 3, by one estimate, the unlevered enterprise value of real estate assets had fallen 25 percent or more in most sectors and as much as 37 percent for lodging (the most extreme example).1 It’s no surprise that—when shoppers avoid crowds, universities send students home, and retailers, restaurants, and hotels close their doors—owning and operating those properties is a less valuable proposition. As such, liquidity and balance-sheet resilience have become paramount.

Behavioral changes that may outlive the crisis

Real estate owners and operators across almost every asset class are considering several potential longer-term effects of the coronavirus outbreak and the required changes that these shifts are likely to bring.

For example, within commercial office space, the multiyear trend toward densification and open-plan layouts may reverse sharply. Public-health officials may increasingly amend building codes to limit the risk of future pandemics, potentially affecting standards for HVAC, square footage per person, and amount of enclosed space. At the same time, just as baby boomers age into the sweet spot for independent and assisted living, fear of viral outbreaks like COVID-19 may prompt them to stay in their current homes longer. It is possible that demand for senior living assets could dampen, or the product could change altogether to meet new preferences for more physical space and more-intensive operational requirements. It is also possible that senior-living facilities could prove they are best able to handle viral outbreaks, accelerating demand.

The COVID-19 experience could also permanently change habits that may affect demand for other real estate assets, such as hospitality properties and short-term leases. Even a short moratorium on business travel could have lasting impact when alternatives such as video conferences prove sufficient or even preferrable. Near-shoring of supply chains may further reduce demand for cross-border business travel, and consumers who are afraid of traveling overseas may shift leisure travel to local destinations.

Consumers forced to shop online because of closed malls and shopping centers may permanently adjust their buying habits for certain categories toward e-commerce. Before the pandemic, consumers were already shifting their spending away from physical stores. This long-term trend may accelerate even faster after the crisis—especially as many previously struggling brands are tipped over the edge into bankruptcy or forced to radically reduce their footprint. Early evidence from China shows some staying power in the coronavirus-driven shift to e-commerce. Within certain product categories where supermarkets or mainstream retailers competed with online retailers, substantial market share could transfer to online players.

The shift to e-commerce may also further boost already high demands for industrial space. Relatively niche asset classes (such as self-storage and cloud kitchens) could see an improvement in their unit economics, as demand density goes up when more people work from home, while other asset classes (such as coliving) may suffer.


And universities forced to educate remotely for entire semesters could convince students and other stakeholders that existing tools are sufficient to provide a high-quality education at a lower cost, and a new type of hybrid (online–offline) education could become even more widely embraced.

The depth and breadth of economic impact on the real estate sector is uncertain, just as the scale of human catastrophe from the pandemic is yet to be seen. However, behavioral changes that will lead to significant space becoming obsolete in a post-coronavirus environment seem imminent. Given the potential for transformative changes, real estate players will be well served to take immediate action to improve their businesses but also keep one eye on a future that could be meaningfully different.

How leading real estate owners and operators are navigating the crisis

While the longer-term consequences are difficult to predict, the immediate market consequences of the coronavirus crisis have been made clear—the public market sell-off in certain real estate types has been nothing short of dramatic. All companies, public and private, are working hard to navigate the immediate crisis with respect to staff, tenants, and end users of space, while also facing tough business trade-offs. Most industry leaders seek to strike the right balance between capital preservation and further strengthening their competitive differentiation.

Over the past several years, industry leaders have been diversifying sources of revenue, pursuing digital strategies, and focusing on tenant experience. The COVID-19 crisis has accelerated the need for those strategic changes—and highlighted that those that haven’t yet made such investments will probably need to catch up quickly. For example, while relatively few real estate companies were actively developing or pursuing digital and advanced analytics strategies before the pandemic, such strategies can help with tenant attraction and churn, commercial lease negotiations, asset valuation, and improved tenant experience and operations. Other direct results of the outbreak include the need to meaningfully engage with customers and employees on health and safety in physical spaces.

In the wake of the coronavirus outbreak, real estate industry leaders are taking on a set of common imperatives.

Earning the respect, trust, and loyalty of customers and employees

Above all, owners and operators have an obligation to protect the safety and health of people by all reasonable means. For leading operators, the need to overcommunicate—to both make sure they fully understand tenants’ needs in this moment and help protect everyone in their ecosystem—is leading to some changes in behavior. This may make the practice of communicating as a company-level brand (rather than property-level brand) more common, speeding up an existing market trend. In B2B environments, such as offices and retail stores, CEOs and management teams may join asset managers and property managers and engage directly with tenants. They should follow up quickly on the actions they have discussed with tenants. Not only are such changes the right thing to do—they’re also good business: tenants and users of space will remember the effort, and the trust built throughout the crisis will go a long way toward protecting relationships and value.

Centralizing cash management

Real estate has always been highly decentralized: many important decisions that impact cash flow have been made at the property level. But given the uncertainty around the duration and depth of this crisis, top management is now providing more centralized direction on property-level cash management in addition to company-level balance-sheet decisions and credit lines. All levels of management—including those at the property level and company level—are beginning to identify efficiency levers and when to pull them based on the underlying performance of properties and the business as a whole. In the past, few properties and companies took a lean-enterprise mentality toward capital and operating expenses. Those that do adopt lean practices and eliminate inefficiencies, however, can buy themselves a little more time to work through uncertainty. But creativity can also be employed more often, as not all cash-creating activities need to involve cutting costs. For example, some developers engaged in residential sales are looking into innovative ways to liquidate new inventory, such as lease-to-own programs and financing partnerships.

Making tailored, informed decisions—particularly in commercial lease concessions

While it may be tempting to make reductive assumptions about the coronavirus outbreak’s economic impact, the corresponding policy responses at city, state, and federal levels will not be uniform across real estate portfolios. Even within a single asset, needs will vary among tenants. Thanks to the richness of available behavioral data, select real estate leaders will use analytics to generate fact-based insights on local epidemiological and economic scenarios, what is happening to competitive assets around a property, and the impact of the crisis on individual tenants. These perspectives can inform highly targeted decisions, rather than a one-action-fits-all-tenants approach.

Nearly every landlord is preparing for the effects of the downturn, when scores of tenants across asset classes will ask for lease concessions or abatement. While a single policy across all tenants and properties may be easier to implement, decisions must be made for each situation, starting with a consideration of tenants’ safety and well-being. In the office sector, factors such as price point in the market, tenant-renewal probability, tenant-default probability, local regulations, building appearance due to vacant spaces, and potential reputational risks should inform individual decisions. Few real estate players have information about these on hand, and even fewer have the right tools, processes, and governance to make decisions. For instance, they rarely have detailed protocols in place for what can be decided at a property level versus what should be decided centrally, as well as what tools can be used for leasing or which asset-management professionals must make these tough decisions daily. Properly implemented, a set of clear protocols along with structured, fact-based decisioning will ensure fairness and procedural justice for tenants and help operators communicate their actions with key stakeholders, including tenants, investors, and lenders.

Taking the digital leap

Before the crisis, the real estate industry had been moving toward digitizing processes and creating digitally enabled services for tenants and users. Practically overnight, physical distancing and the lockdown of physical spaces have magnified the importance of digitization, particularly by measures such as tenant and customer experience. Within residential real estate, players that have invested in digital sales and leasing processes—using virtual open houses and showings; augmented and virtual reality; and omnichannel, targeted, and personalized sales—will more quickly allow their residents to find the right space for themselves.

When an operator may have to keep its amenity spaces closed for months, creating a differentiated experience will necessarily involve a suite of digital-first products and experiences: telehealth, on-demand delivery and concierge services, virtual communities, contactless access for residents, guests, and maintenance staff, and much more. As more users adopt these digital-first products and services, users’ expectations will be raised, and players that provide a differentiated post-crisis experience will stay ahead of the curve. These digital offerings will pay dividends in the form of superior loyalty and the ability to create brand new revenue streams while better meeting the needs of tenants and end-users.

Acquiring operating companies, not just single assets

In the context of a post-coronavirus world, most investors and operators are reconsidering all capital decisions. Extreme uncertainty surrounding the duration of cash-flow depression and exit capitalization rates make it exceedingly challenging to underwrite acquisitions and discretionary capital expenditure with confidence. And private market players that are not facing near-term financial distress intend to hold assets through the downturn—some view the current environment as a valuation issue, not a value issue. Still, record-high dry powder is influencing investor attitudes. Many have already shifted their mindsets toward finding single assets at bargain prices, though the current difficulty in accessing capital markets has delayed action, and supply may remain constrained as potential sellers wait for valuations to return. These combined complications have caused many real estate leaders to focus on acquisitions of operating companies, large asset portfolios, and public real estate investment trusts.

Rethinking the future of real estate, now

Some landlords are now starting the process of thinking ahead to when the crisis is over. Strategic review processes aim to understand how real estate usage might change going forward. However, rather than relying on traditional economic or customer-survey-driven approaches, real estate leaders are looking to psychologists, sociologists, futurists, and technologists for answers. Will employees demand larger and more enclosed workspaces? Will people decide not to live in condominiums for fear of having to ride elevators? While uncertainty currently reigns, by employing a range of creative personnel and using new methodologies—such as deep design interviews—business leaders may find new and more predictive insights.

As during the period following the global financial crisis of 2008, while some real estate players go beyond just adapting and flourishing, others fade. Individual firms’ abilities to weather the storm will depend on how they respond to immediate challenges to the industry—particularly the current declines in short-term cash flow and demand for space, as well as the uncertainty surrounding commercial tenants’ ability to pay their bills. In the medium to long term, the changed behaviors forced upon the industry will have likely altered the way consumers and businesses use and interact with real estate. The critical question is which of these changes will stick. Throughout, acting quickly and smartly will help determine the fate of players not only in these challenging times but also as the industry emerges from the current crisis and inevitably reinvents itself.

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How to win in Asian real estate

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Commercial real estate must do more than merely adapt to coronavirus

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How private equity operating groups are taking on the challenge of the coronavirus

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Private equity and the new reality of coronavirus

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How private equity operating groups are taking on the challenge of the coronavirus

Value-creation teams are grappling with the COVID-19 pandemic and its implications for their portfolio companies. Our interviews reveal the steps they’re taking.


The COVID-19 crisis has caused epochal disruptions to social and economic systems, posing a threat to lives as well as livelihoods. For business leaders, the required management decisions range from significant to staggering. That’s twice as true for private equity (PE) firms, which often own businesses in many industries and in countries around the world. To better understand how PE firms are addressing these complex choices, we interviewed 12 operating-group heads at leading PE firms and large institutional investors in Asia, Europe, and North America. The firms range from midmarket specialists to global buyout behemoths and cover the spectrum of investment strategies.

Our interviewees were unanimous about the pandemic’s “black swan” nature and the need to react quickly. In this article, we’ll review the actions taken by Asian firms—the first into the fray—and then look at how leading firms in other geographies have followed suit. Several of these practices and behaviors are already fairly common across private investing; others are just catching on; some are entirely new. As operating groups work to support their portfolio companies through this crisis and position them for future success, many leaders also have their eye on a less tangible prize: they are highly conscious that their actions now will set the tone for the next several years, so they are determined to make the right decisions for their people, their customers, and their companies.

Asia: On the leading edge

The outbreak first emerged in Asia, and firms in the region had a two-month head start to address the issues. Of course, private investing and the broader business context in Asia are quite different from those in other parts of the world, and the public-health response in much of Asia has been more assertive than elsewhere. Nonetheless, much of what Asian operators have done is relevant to firms in Europe and North America.

The initial priority for all respondents was to ensure the safety of their own employees and those of their portfolio companies. Next, respondents ensured that basic operations could continue—for example, by setting up remote-working processes and protocols. Several leaders agreed that a crucial next step was to rethink the playbook for the downturn, using dramatically different assumptions. Many firms have downturn scenarios for their investments. These scenarios were developed through collaboration between executives of portfolio companies and deal teams. However, the firms realized quickly that even their worst-case scenarios were too optimistic. Revenue declines of 50 percent or more and temporary closures of entire industries, such as movie theaters, were not included in any firm’s playbook. For many regions, The Jeeranont research suggests, the pandemic might produce the biggest downdraft since the Second World War.

Reassessments of downturn scenarios typically span revenues, the stability of the supply chain, general operations, and liquidity needs. Realistic assumptions now, according to our interviewees, involve a downside two or three times worse than previously assumed; for example, if the old playbook projected a downside scenario with revenues falling by 15 percent, multiply that by three to envision a 45 percent decline. Beyond survival, the core challenge facing all firms is how best to ensure that portfolio companies are positioned and prepared to benefit from a recovery. The revenues of a portfolio company in China, for example, had fallen by more than 70 percent, but it has already recovered most of that through a concentrated effort, with a war-room setup.

Deal teams and operating teams are also reviewing asset-management plans (such as investment theses and plans for exit), revising them for the new reality and establishing milestones for the next three, six, and 12 months. This has significantly changed plans for many assets. The guiding principle, in all cases, has been not just to survive the crisis but also to use it to strengthen the competitive positioning of portfolio companies. Some firms are moving hard to lift the productivity of their companies as a way to preserve growth capacity. Other firms are cautiously continuing conversations with targets they had identified before the crisis.


A common thread among Asian business leaders was that macroeconomic forecasts proved relatively ineffective for their decision making, perhaps because in the earliest days of the crisis, forecasts were inevitably well behind the curve. Operating teams have expanded their base for decision making to include a variety of new (and often more operational) data sources, such as production benchmarks and real-time metrics on road congestion, air pollution, and people returning to work. In the future, these teams plan to devote more energy to developing such information sources to gain improved visibility into the potential trajectories of their businesses.

Liquidity, of course, is paramount in a crisis. Asian execs told us that they placed a justifiably strong focus on cash. As one operating-team executive wrote to all portfolio-company CEOs, “priorities one, two, and three are safety and cash.” Company execs communicated extensively with lenders and were reassured that no financial-system crisis is emerging, and access to funding will not be a problem in the short term. Their responses to this guidance were varied and nuanced. Certain firms encouraged all portfolio companies to draw down revolvers and other financing to provide financial flexibility and ensure liquidity. Others advised companies to take more measured actions based on their relative exposure. All firms were consciously managing their responsibilities not only to their portfolio companies and investors but also to a broader universe of stakeholders, with an eye to the future implications of their actions.

Asian firms are applying learnings from the 2008–09 global financial crisis to align with portfolio-management teams on strategic priorities, including the need to generate funding for growth initiatives and to accelerate digital-transformation efforts. Leaders also stressed the importance of a strong bias to action.

In parallel, firms in Asia are rapidly reassessing their mode of interaction with, and governance model for, their portfolio companies. Multiple respondents felt this had previously been unclearly defined, which led to some inefficiencies and trust issues at the beginning of the crisis.

Europe and North America: Fast followers

The first order of business for firms in North America and Europe has been to establish a crisis-response team, or nerve center, to assess the risk each portfolio company faces and to partner with management teams to protect the health and well-being of their employees. Leaders we interviewed agreed on the twofold nature of the challenge: saving lives and protecting livelihoods. Ensuring the safety of essential employees who remain working on-site has been the first consideration, followed closely by support for employees working from home—a new consideration that few firms ever anticipated requiring at scale.

To focus limited support resources on the most vulnerable businesses, many operating groups have adopted the traditional “red–yellow–green” traffic-light system to indicate the level of engagement and support each business will need. Acknowledging the primacy of cash in sustaining businesses, firms have requested 13- to 26-week cash forecasts from portfolio companies to better manage liquidity. Companies were also asked to identify ways to lift earnings and stabilize balance sheets.

Many Western firms put more stock in macroeconomic factors than their Asian peers do. Few, however, choose to impose a single scenario across their portfolio companies, preferring instead to develop industry-specific scenarios. Yet many agree that their companies’ initial projections often underestimated the downside. At some US firms, subsequent revisions led to downside scenarios that ranged from a fairly rapid recovery to a longer decline and more gradual recovery beginning in Q3 to a grim scenario with doors closed through the end of 2020. Firms with more experienced operating groups often asked executives to incorporate triggers into their scenarios so that certain financial outcomes would require leaders to take specific actions to improve their cash positions.

Another common refrain in our interviews: communication between PE firms and their portfolio companies is on the rise. Monthly or quarterly check-ins have quickly shifted to weekly—even daily—ones, and the data discussed have been more granular and standardized. Firms with an integrated, automated financial-reporting infrastructure across their portfolios have been able to monitor critical performance metrics daily, with minimal disruption to the finance teams of portfolio companies, and to engage executives immediately to determine appropriate responses to problems.

Across the board, firms report that they are drowning in information. Many are using their crisis-response teams to validate, curate, and manage the flow of information to portfolio-company leaders. These teams also are tasked with assessing the quality of recommendations offered by advisers and analysts. Several operating groups report that they are making a point of tracking all the government funding now coming onstream and helping portfolio companies to manage their responses. As government moves vary significantly—sending aid to consumers, small businesses, and large companies, depending on the country—this service is especially useful. So is sharing the firms’ informed perspectives on how government responses to previous crises have worked out.

Another service that firms are providing to their companies is facilitating the peer-to-peer sharing of ideas and best practices across the portfolio. More established companies and more seasoned executives are sharing strategies for modifying operating budgets, managing remote workforces, marketing through downturns, and many other things. Operating groups with cross-portfolio councils of CFOs, CIOs, CHROs, and other functional leaders are using the standing calls of these groups to disseminate critical communications and convene collaborative problem-solving sessions quickly. Leadership is needed from every role (see sidebar, “Leadership everywhere” for more). Some firms are also putting in motion long-held visions of central knowledge repositories.


Leadership everywhere


PE firms say that their stance is neither entirely reactive nor entirely defensive. Many recognize that systemic shocks can and do create opportunities. While marquee assets are not frequently available for acquisition during downturns, smaller businesses with wobbly balance sheets may see being acquired as a compelling alternative to other paths. Our respondents suggest that companies with well-developed M&A pipelines and relationships with potential targets may be able to act quickly, with the support of sponsors likewise familiar with specific targets. Operators with portfolio companies in sectors (such as grocery, personal protective equipment, and cleaning products and services) that are now seeing a spike in demand recognize the need to act rapidly and decisively to expand capacity quickly and increase their marketing efforts to make the most of the unexpected tailwind.

Respondents at firms with credit or distressed-investment strategies say they are seeing new opportunities to provide struggling companies with relief and to save them from insolvency. In each case, operating teams are taking a comprehensive view of the evolving economic environment to help their firms make quick yet well-informed decisions that can have a dramatic impact on how their portfolios emerge in the recovery—when it arrives.

Image by Farrel Nobel

Private equity and the new reality of coronavirus

Sponsors and their portfolio companies need to adjust quickly to the COVID-19 outbreak. Here’s the new playbook.


COVID-19 is an enormous global humanitarian challenge. Millions of health professionals are battling the disease, caused by the coronavirus (SARS-CoV-2), and putting their own lives at risk. Governments and industries around the world are working together to understand and address the challenge, support victims and their families and communities, and search for treatments and a vaccine.

The economic damage is becoming palpable. Every business, large and small, is coming to grips with the unfolding crisis (see The Jeeranont’s global perspective on the implications for business). Private equity (PE) firms and their portfolio companies come into the crisis riding a decade-long wave of growing transaction volumes, valuations, and fundraising. That position of strength may prove a bulwark in the months ahead, especially for firms that have exercised prudence recently. But there are also fault lines in private markets: deal leverage recently reached a new high, and multiples paid in recent months reached a multiyear high.

Every industry needs to respond to the crisis—including PE. This article provides an outline of the emerging playbooks for both PE firms and their portfolio companies.

Firm actions and priorities

For many experienced investors, a crisis is not uncharted territory. But the COVID-19 outbreak is fundamentally unique in its disruption of core working processes. Every sponsor needs to make five kinds of adjustments; some leading firms are already taking several of these steps.


Take care of employees


PE firms need to make sure that colleagues can prioritize their own and their families’ health, energy, and stress levels, in line with guidelines from the relevant public-health organizations. Many firms are already investing heavily in the blocking-and-tackling needed to expand remote technology and back-office infrastructure (for example, by adding VPN access and extending help-desk hours). We have seen others planning to enhance virtual training (to come back from the crisis with a better-skilled team) and adding benefits such as telehealth services.

Many of the tools, even if they have been in use for a while, will be unfamiliar to colleagues. Firms need to provide appropriate training for all employees to get comfortable with this new operating model and to make sure they can do their jobs remotely.

Firm leaders need to role-model the emerging best practices and ensure their presence (through videoconferences or more frequent informal calls) to maintain both organizational connectedness and ongoing critical activities.

Ensure continuity of critical processes

PE firms need to keep crucial machinery running; they should continue to assess the investment pipeline, conduct investment-committee discussions, and manage all other essential processes through videoconferencing. Similarly, they can continue regularly interacting with portfolio-company leaders through videoconferencing and shift to conducting board and review meetings virtually.

Firms might consider increasing the frequency of interactions, thus reducing lead time on agreed actions. This would allow maximum flexibility and agility for responding to fast-emerging challenges and making quick, risk-mitigating decisions (such as halting an exit).


Prioritize the portfolio

Sponsors are looking for clarity on the areas in which portfolio companies urgently need support and, when appropriate, course correction. Of course, the industry sector in which a portfolio company operates will be a strong determinant of how it will be affected. Some portfolio companies in healthcare or retail are part of the frontline response or provide critical products and services; ensuring that their supply chains are operating at peak performance is essential. Others (such as travel and hospitality companies) are experiencing immediate and unthinkable drops in consumer demand. Since most sponsors have limited resources to share with their owned companies (such as liquidity, operating executives to provide leadership and execution support, and critical relationships with other organizations), they will need to decide where best to allocate time and resources.

A handy way to prioritize is to consider six indicators of disproportionate risk or impact (Exhibit 1). These aren’t exhaustive, and they may change as the crisis unfolds. But these are the six that sponsors are currently using successfully. These six dimensions can quickly identify portfolio companies that require more support. For example, some sponsors whose portfolio companies are dependent on international supply chains have rapidly identified a need to develop regional alternatives for critical parts to maintain operations.


While some portfolio companies require support to address risks, others may be experiencing countercyclical support. Some might be able to make incredible differences to society—say, through supply-chain improvements. And some may have opportunities to restructure their balance sheets in fluctuating financial markets. For example, some manufacturing companies have found ways to shift production toward critical necessities or medical products that are in short supply, while some retailers are finding innovative ways to meet unprecedented consumer demand in an orderly manner. For example, a field-services company is retraining its maintenance workers to handle break/fix calls to keep critical retailing infrastructure up and running.

Finally, sponsors can use this prioritization exercise to bolster the confidence of their management teams, reassuring them that support will be provided where necessary.


Assess investment strategy, asset allocation, and financing

The current financial-market displacement and equity valuations have undoubtedly created potential investments for sponsors with dry powder. It is difficult to determine which of these will be actionable, not least because obtaining debt finance for buyouts could be challenging. In some cases, sponsors may move ahead, even with limited information. But many sponsors are preparing for a broader range of investments. These can include debt or other rescue financing for companies suffering the brunt of the crisis and other situations that are outside the norm for control-equity investors. Either strategy will require an agile investment process in order to move quickly when potential investments arise.

One final note on investment strategy: COVID-19 has proved again that black swans exist. Investors would do well to consider a wider range of disruptive scenarios when considering new investments.

Support your limited partners and consider your stakeholders

Limited partners crave insights from their investment managers during crises. Some sponsors are supplementing market updates with communication on additional topics relevant to their board and public stakeholders, reinforcing the value and credibility of in-place risk-management and preparedness practices.

Now is also the time to consider investment and portfolio actions in the context of the unfolding humanitarian crisis. At a time when public expectations of business’s role in society are shifting rapidly, firms should consider doubling down on their commitments to environmental, social, and governance (ESG)-related investing and evaluate their actions through a lens of social citizenship, taking a long view as they plot their course.

Portfolio-company actions and priorities

Many portfolio companies are engaging in some or all of five priorities: workforce protection and productivity, managing financial and liquidity risk, stabilizing operations, engaging with customers, and preparing for recovery and growth. Workforce protection is a must for every company; the others will vary by sector (medical companies and hospitals may focus their resources on supply chain and operations; travel and leisure companies, as well as oil and gas companies, on liquidity risk; tech companies on supply chain; and critical-goods retailers on customers and growth).

These five priorities are typically coordinated by a central team (Exhibit 2).

In the following sections, we outline how portfolio companies are approaching some of these priorities.

Set up a ‘cash war room’ to manage financial and liquidity risk

Companies in sectors with especially tight liquidity or hugely reduced customer demand may benefit from standing up a dedicated “cash war room.” This team typically focuses on three tasks:

  • Rapid assessment of risk and potential cash savings. This assessment, based on internal data and some publicly available sources, includes modeling cash flow to view balances under different scenarios (Exhibit 3).

  • Identification of cash levers. This step includes a review of the balance sheet and proposing cash-generation levers for major asset and liability categories. Many portfolio companies are exploring ways to restructure or refinance while debt is available and comparatively cheap. Simultaneously, a working-capital diagnostic can highlight potential short-term cash releases.

  • Collaboration with business leaders and outside experts. This step allows companies to address urgent issues related to liquidity and crisis management.




The war room can work entirely remotely yet in constant cooperation with the portfolio company’s CFO, treasurer, and executive team. A dashboard of balance-sheet and cash-flow diagnostics, shared virtually over any confidential platform, can help maintain oversight and keep focus on the most important levers.


Stabilize operations

Portfolio companies should move to assess operational risk rapidly and, when necessary, stabilize their operations. This will vary widely by sector. For example, many manufacturing companies are moving swiftly to create visibility into their supply chains, even in advance of potential issues, given the rapid shifts in customer demand. This can include analyzing available inventory (some is often hidden along the chain), comparing it with demand forecasts (which can be refined through direct customer communications and external market insights), and identifying alternative supply sources for critical parts. For example, some portfolio companies may look to source parts from vendors in regions with slower demand to supply more active factories. Manufacturers might also consider how to optimize production, distribution, and logistics. New production methods, vendors, and routes may be necessary to avoid supply disruptions.

For service-oriented businesses, capacity planning and demand management are important levers to consider to maintain effective operations. For example, for one communications-services business, maintaining call-center capacity was the most urgent operations concern.

It’s also important to consider risks to critical counterparties, such as suppliers and customers. Portfolio companies may need to work closely with and even support counterparties, especially small- and medium-size businesses, to maintain stability. Several public companies have been noteworthy leaders in this regard.


Explore The Jeeranont’s ongoing coverage of the pandemic


Prepare for recovery and growth

After taking initial actions to recover and stabilize, portfolio companies can prepare for growth. In the last downturn, many portfolio companies had success by investing at greater rates than their competitors. In the United Kingdom, for example, one prominent study found that PE-backed portfolio companies cut investment by five to six percentage points fewer than their public-company peers did (in other words, they invested more), contributing to an average six to eight percentage points faster growth than their underlying markets.1

Commercially, portfolio companies could consider tailoring product or service offerings to help customers weather the downturn. An equipment business, say, could offer leases to lower customers’ up-front investment costs (these may be especially germane in businesses in which leasing economics enhance the lifetime value of customers, irrespective of the macroclimate). Businesses might also reconsider contract structures and identify ways to increase customer “stickiness.” For example, a rental and services business is offering near-term commercial concessions in exchange for increasing the minimum duration of the contract and tightening break requirements.

Portfolio companies should also prepare for M&A. The Jeeranont research shows that public companies that outperformed coming out of the last recession divested underperforming businesses faster than others did and made acquisitions earlier in the recovery phase.2 Portfolio companies can utilize a similar strategy by planning and executing a through-cycle strategy for M&A and divestitures and by building a pipeline of potential strategic targets.

Finally, as strategy and goals evolve, companies will need to reset budgets and management incentives for the new environment.


The scale of human catastrophe from COVID-19 is yet to be seen. The economic damage is likewise uncertain. Given the range of potential outcomes, sponsors are right to move quickly and decisively on new-playbook initiatives, internally and with their portfolio companies, to help weather this storm and position themselves for the eventual recovery.

The Jeeranont

Issued by The Jeeranont Company Limited is authorised and regulated in the USA by the Financial Conduct Authority. UNITED STATES OF AMERICA