This article originally appeared on PENews.com (subscription may be required).

Judging from the data through April, Covid-19 has already taken a hammer to private equity activity in Europe. Buyouts and exits have fallen sharply and there’s plenty of downward pressure on fundraising and returns. Given rampant uncertainty, it’s difficult to predict what to expect next. But based on the industry’s response to previous downturns and what we’re seeing now, here are a few things to look for:

With buyouts on hold, firms will focus on debt and public equities

The number of buyout transactions in Europe fell 51% from January to April, compared with a 60% drop globally. General partners (GPs) are focused on stabilising portfolios, sellers are reluctant to unload their companies amid turmoil and leveraged lending around the world has fallen 80% globally so far this year. At the same time, however, there’s never been more dry powder in the market available to do deals – around $600bn focused on European markets alone – forcing firms to get creative.

For equity funds, that means pursuing everything from investments in preferred stock and warrants to private-investment-in-public-equity (PIPE) transactions. PIPEs are bespoke investments in newly issued tranches of equity that can help public companies raise cash quickly when banks are reluctant to lend. In the US, investors have nearly $8.6bn in PIPE deals this year through May 12. Relatively few sponsor-backed PIPE deals have emerged publicly in Europe. But that will likely change. PIPEs and take-private transactions are actionable ways to deploy available capital.

Debt also offers opportunity. Funds with the right mandate and capabilities have been pressing on various debt strategies – loan-to-own, trade in/trade out, direct lending, and so on. Some have also been buying below par debt in existing portfolio companies. Private debt capital focused on Europe has grown rapidly since 2008, and now sits at around $89bn, according to Preqin. Now is prime time to put it to work.

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A slowdown in exits will hamper sponsor-to-sponsor buyouts for now

Any turnaround in the European buyout market will ultimately depend on exits. Over the past five years, half of all buyouts in Europe more than $75m in value have been sponsor-to-sponsor deals between private equity funds. The pace of that channel relies on exit velocity.

For now, sellers are hunkered down. The number of exit transactions in Europe fell 58% from January through April, compared to a 72% drop globally. Funds want more certainty before selling anything they don’t have to. Indeed, 83% of GPs surveyed by Investec recently said they didn’t expect to exit any of their portfolio companies over the next 12 months. That could change rapidly, however, as soon as market conditions improve. GPs coming off many consecutive years of strong dealmaking are sitting on billions in companies they would quickly unload in a normal market. They won’t exit if the price isn’t right. But the ageing pool of assets will likely accelerate activity once the rebound takes shape.

Raising funds just got tougher

Through April, fundraising totals have actually been pretty good. European-based firms raised $45bn, or 16% of the total $28bn raised globally during the first four months. What we’re seeing, however, is a bit of a mirage. The bulk of the money raised this year actually reflects efforts that preceded the Covid-19 crisis. Attracting capital in coming months will be a different ball game. In a recent survey of limited partners (LPs) by Campbell Lutyens, only a third said they will continue with “business as usual” when making new fund commitments. One reason was that despite the fall off in new deals, capital calls have actually increased since the Covid-19 crisis began as GPs look to shore up portfolio companies and strategies like distressed and special situations accelerate their investment pace. That puts pressure on LP cash flows.

Secondaries and other alternative arrangements will flourish

Cash flow, in fact, will be a critical issue for both LPs and GPs in coming months. To the extent portfolio companies need more capital and LPs are pressed to provide it given other demands on cash, different sources of capital will likely step up. These arrangements can take many forms, from asset sales to fund recapitalisations. They could be structured debt deals – where GPs borrow at the fund level to generate new capital, secured by portfolio assets – or structured equity deals, where the GP receives capital from secondary sources to support the portfolio or accelerate distributions to LPs. The system has ample capital. It will inevitably flow to where it’s needed most.

Returns: short-term pain, long-term gain

Funds typically try to get the bad news out of the way as quickly as possible, so it’s no surprise that a majority of both LPs and GPs in the Campbell Lutyens survey said they expect to see write-downs of at least 15% in funds’ first-quarter valuations globally. The industry’s pattern coming out of downturns, however, is pretty clear. Deals made shortly before the downturn tend to do less well than those made during and after the downturn. The best way to maintain strong returns long term: stay on offence.

Firms will rethink how they operate

Private equity has always been an analogue, face-to-face business. But finding ways to get work done through the Covid-19 crisis will accelerate the industry’s adoption of digital technology. Firms have learned that collaboration tools can often be more efficient than jumping on a plane. They are seeing that advanced analytics can transform due diligence by providing more high-quality outside-in data than has ever been available before. Handshakes and relationships aren’t going away. But digital technology is rapidly transforming how firms find deals, close them and add value during hold.

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