Download full Board Memo 2021
After years of being followers in venture and growth-stage investments routinely led by VC funds and other “usual suspect” financial investors, corporates have now become established players in early- and later-stage private company financings. And while corporates shied away from the risk of minority investments during the 2009 financial crisis, in 2020 they stepped up to the plate, many with cash to spend during a period that offered unique opportunities including due to decreased competition from financial investors who took a step back early on in the pandemic. Corporates’ increased exposure to minority investments, when combined with the new features, challenges and opportunities created in 2020, requires boards and management to take a fresh look at their portfolio investments and approach to future investments.
Early in the pandemic, commentators predicted a wave of down rounds, perhaps coupled with a greater ability for investors – financial sponsors and corporates alike – to negotiate stronger governance and economic rights than those the market had largely coalesced around prior to the crisis. In reality, although some of those scenarios have materialized, we have not seen investors dramatically change the course around terms like redemptions (more likely than not, investors do not have a put right), liquidation preference multiples (1X remains the norm), pay-to-pay provisions (typically only in down rounds) and consent rights (which continue to vary deal-by-deal). So, while corporates may be well-positioned to invest as we enter 2021, they should not expect deal terms to have shifted significantly. And they may find themselves more frequently leading early-stage financings, as data shows that while financial firm investments have not declined overall in 2020 they have shifted somewhat away from early- to later-stage financings.
The IPO exit on the other hand has a new flavor this year, with the resurgence of SPACs offering private companies a path to the public markets. And after an IPO downturn early in the year, the Q3 surge in regular-route IPOs is now expected to continue. Add direct listings to the choice of routes to public company status, and corporates have is a high likelihood of becoming a public company shareholder. Corporates need to ensure they have a mechanism in place to manage public company portfolio investments, including an understanding of restrictions on resale, registration rights and other liquidity options. When making an investment, it will be essential going forward to ensure that liquidity rights apply to stakes in public companies that have become public not only through a traditional IPO. Depending on their relative ownership percentage and governance rights at the public company, corporates will also need to manage required regulatory filings with the SEC.
With respect to M&A exits it would be unrealistic not to acknowledge that there have been success stories and distress stories in 2020, and we expect further opportunities for consolidation in certain industries that already-invested corporates are well positioned to seize. In addition, corporate investors that have had a chance to look under the portfolio company hood can act swiftly to consummate a deal. Corporates should consider whether to negotiate a right of first offer or call option to acquire the company at the time of the initial investment. We’ve seen a significant number of corporates in the second half of 2020 make strategic acquisitions of portfolio companies in which they had a minority stake.