Co-Author by Rudyard Griffiths

How will the private equity industry change post-pandemic? Guy Berman and Stefan Stauder give their insights into effects of the COVID‑19 crisis on the private equity industry on both sides of the Canada‑U.S. border. From fundraising trends to shifting M&A and financing landscapes, we discuss issues top of mind for clients as they draw up new playbooks for a transformed private equity environment. Gwen Watson rounds up the discussion with a closer look at the Canada Emergency Wage Subsidy, and the tax considerations for PE investors and businesses looking to access this program.


A full episode transcript follows.

Rudyard Griffiths (00:02): Hello, and welcome to Torys Business Brief. I'm Rudyard Griffiths. You may know me as a convener of the Munk Debates where we bring together the world's sharpest minds and brightest thinkers to debate the top issues of the day. As the host of Torys Business Brief, my role is to provide you, the listener, with compelling conversation about the legal challenges the COVID-19 pandemic presents for businesses and business leaders.

RG (00:27): We're all taking stocks of the ongoing effects of the pandemic. As the world continues to respond, businesses have wide-ranging issues to consider. This podcast will equip you with actionable knowledge your business can use to emerge from the current crisis resilient and ready to thrive. To do this, I'll be drawing on the expertise and insights of the lawyers working at the firm named Corporate Law Firm of the Year by Chambers and Partners, Torys LLP.

RG (01:19): On today's episode of Torys Business Brief, we'll be speaking to private equity partners Guy Berman and Stefan Stauder. We'll also be joined by tax partner Gwen Watson. Together, we'll discuss the impact of the pandemic on the private equity industry as well as the latest developments of the government's Emergency Wage Subsidy program.

RG (01:43): Guy is a partner in Torys' Private Equity practice. He advises clients on all aspects of their investing activities, including management and leveraged buyouts, equity investments, divestitures, and shareholder arrangements. Stefan is a private equity partner in Torys' New York office. He advises clients on public and private acquisitions, consortium transactions, and co-investments along with joint ventures and other corporate transactions.

RG (02:13): Gwen Watson is a partner in Torys' Tax practice. Gwen provides income tax advice to corporate clients with an emphasis on mergers and acquisitions, corporate reorganizations, as well as cross border and capital market transactions.

RG (02:29): Today, we'll start the conversation with Guy and Stefan. Welcome, both of you, to Torys Business Brief.

Stefan Stauder (02:35): Thank you, Rudyard, for having us.

Guy Berman (02:36): Glad to be here.

RG (02:38): Well, I'm looking forward to this conversation. Private equity is one of the key barometers of the economy, so this type of discussion, I think, opens up for the business leaders and executives who are listening to this podcast to a unique window into what's happening into the economy right now in real time. I think it also can give us a sense of where we could be. That's, hopefully, in a recovery in the months to come in terms of the demand on private equity and how this industry is evolving in the context of this crisis.

RG (03:10): With that thought in mind, I want to come to you first, Stefan. Just give us your sense of the intelligence that you're gathering through your clients, right now, in real time. What's the short-term impact that you've seen this crisis, COVID-19, have on the private equity industry, and what's top of mind for your clients?

SS (03:33): Sure, Rudyard, happy to do that. The short-term impact hasn't been as pronounced as one might expect. We are seeing closings. We're seeing, to some extent, an acceleration of the fundraising processes. PE funds that have been in the market are trying to get the money in the door, which is perhaps not surprising. We're seeing a proliferation of distressed M&A and lending funds, including special managed accounts in that space, so there is activity, and the patient has a pulse at least for now.

GB (04:12): Picking up on that, as we went into the shutdown and stay at home, what was at least surprising to me was that our funds lawyers at our firm were probably the busiest lawyers around at least in the private equity group.

GB (04:26): As Stefan mentioned, there was an acceleration of fundraising processes, but I think what really was happening was you had all of these funds that were in the middle of raising funds and they just said, "Look, we've got to get our first closing done as quickly as possible," and so closings that were scheduled to occur in May and June were, all of a sudden, closing in March and April, so lots and lots of activities on that end. Then I think, as Stefan mentioned, folks are now setting up distressed and lending funds, and so our funds lawyers have been very, very active helping clients invest in and raise new funds.

RG (05:06): Interesting. Now, we have the benefit of the two of you straddling the border. Torys is working in both New York and Toronto, Canada and the United States. Stefan, what differences, maybe, are you seeing in the initial response to the crisis but maybe also the policy environment, the government response that private equity in Canada is operating in versus the United States?

SS (05:30): In the U.S. the policy response has really been tricky from a private equity perspective. The two key programs here are the Paycheck Protection Program—the PPP—that's a program under the CARES Act that allows forgivable low-interest loans for small businesses. Small businesses are businesses with less than 500 employees. The way the 500 employees are counted is they take into account the employees of affiliated entities, and so that makes it a problematic, tricky program for private equity to access.

SS (06:04): The other main program is the Main Street Lending Program. That's a 500-billion program administered by the Fed. While that is potentially eligible for private equity, it comes with restrictions related to things like employee compensation, dividends, capital distributions, all things that are obviously tricky for private equity to abide by.

RG (06:28): Guy, what's the view in Canada in terms of the government response and how it's impacted private equity in Canada?

GB (06:36): In Canada, our government's taken a different approach. The focus has not been on shareholders and owners of businesses, but it really has been on making sure employees are taken care of and employees, to the extent possible, can continue to maintain their jobs and salaries, so a very different approach, trying to help the employees and trying to help businesses.

GB (06:58): I'm not sure why the policy in the U.S. is as it is. It seems political and that there is some kind of negative connotation with respect to private equity buyers, but in some ways, to me, it seems like the wrong policy objective to say a business that's owned by a private equity fund isn't going to get the same access to employee benefits that a non-PE fund owned business would get. Lots of pension funds, both Canadian and American, invest in private equity funds, and so what you're really asking is you're asking pension funds that have already suffered massive losses during COVID to then step up and put additional capital into companies and not getting the same government assistance. I think it could be a double whammy for certain investors.

RG (07:45): Great points there. Let's talk about the longer term. We knew, going into this, this exceptional event COVID-19, that private equity was an increasingly important feature of Canadian capital markets. It was a place where longer-term patient capital was finding a home to stimulate productivity and growth, so this is a key building block for the Canadian recovery.

RG (08:14): Guy, to come to you first, what do you see as some of the longer-term impacts? I mean, obviously, they're going to be negative, but I guess where, particularly, do you see the pain points emerging in the coming months?

GB (08:29): Rudyard, I think the biggest pain point now for private equity is looking at their portfolio companies and saying how can we make sure that our portfolios survive the next month, two months, six months, year? How do we make sure that our companies have enough liquidity to survive and to keep folks employed? I think that's currently the biggest challenge.

GB (08:53): I think a second challenge is these private equity funds. Investors invest it so that they can go out and buy businesses, and so, at the same time that they're focused on their existing portfolio, they've got to start looking at ways to buy new businesses. We've now shifted into a different M&A market, and we'll talk about that, and so now it's thinking differently in how are we going to do deals in this market?

GB (09:22): I think those are two of the biggest issues facing us. I think the silver lining is, when we go back to 2008 and 2009 and the financial crisis, what we've learned from that is that that was a particularly good vintage for private equity funds. Folks who were able to do deals during that time really saw terrific returns for their investors, and so I think there is opportunity now.

SS (09:50): Yeah, sorry. I would echo a lot of what Guy is saying. I think the liquidity point is absolutely paramount right now and, fortuitously, I think we've seen lenders accommodate revolver draws us up until now, so I think we're entering somewhat calmer waters there.

SS (10:08): From a fund raise perspective, as you noted, Rudyard, there's obviously... Conventional wisdom is that it will have an adverse impact, but a lot has changed since 2008, and many LPs have increased their private equity allocation, so whether that alone really means a doomsday scenario or a significant slowdown for the fund raise environment is something we'll have to see.

RG (10:35): I mean some of the bigger existential risks here, Guy, clearly is a failure to meet a capital call. Do you see that as a stress, a feature that is bubbling out there or, again, because of these revolving credit, the flood of liquidity from central banks and elsewhere, are those types of more existential risks still in the background?

GB (11:00): I think there is an existential risk for some limited partners of private equity funds, and so those that have a lot of exposure to the capital markets or to certain industries that have really deteriorated to the extent that they just don't have the capital to make a capital call when a private equity fund is going to make another investment. I think there's some risk there, and these private equity funds have really draconian punishments for folks who aren't able to meet their capital calls, but we saw this in 2008 and 2009 as well.

GB (11:37): What ended up happening was there ended up being quite a frothy market in the GP secondary market. This is the secondary market where certain limited partners of private equity funds sell their interest to other investors. I think we'll see lots of secondary deals. What I don't think we are going to see is a private equity fund being in a situation where they're doing a transaction, they're calling capitals from their investors, and they don't have sufficient capital to meet their obligations. I don't think that's going to happen, but I think there will be some limited partners that will have to get out of some funds.

RG (12:15): Stefan, do you share that view?

SS (12:17): I do. I think LPs, generally, will just become more selective in where they're deploying their money. We mentioned distressed funds, debt funds. Turbulence generally tends to reshuffle the deck, so I think LPs will look much more carefully at sector expertise, at who has the best track record and, in particular, execution strategy. I think that this trend towards specialization and top GPs will, to some extent, be exacerbated by this crisis.

RG (12:56): Hi. Thanks for listening to Torys Business Brief. For more information on how organizations and business leaders should be addressing the challenges of the COVID-19 pandemic, visit You'll find a wealth of in-depth resources and new analysis and insights. Again, that website is

RG (13:22): Let's move on and talk now about transactions and what they can tell us, transactions that are pending, things that are going on right now, and try to read those tea leaves a little bit for our audience in terms of a kind of yard stick, potentially an interesting predictor of where this recovery, where this crisis could be headed.

RG (13:45): Guy, maybe to start with you, what are you seeing with respect to pending transactions at this point?

GB (13:52): First, what we're seeing is, for good assets that are being sold and where there's an auction process, we're finding the bankers are pulling those deals because they're waiting for a frothy market and maybe backing up a little bit. We are coming from a period where it was an incredibly seller-friendly market out there. Prices were at an all-time high. Deal terms were really, really seller-favourable, and so folks that were in the middle of selling businesses and, all of a sudden, we walk into this pandemic, they've pulled a lot of those deals, so we're seeing a bit of a contraction in wide auction processes.

GB (14:38): At the same time, some deals are continuing. Large strategics selling non-core assets, it's a great way for the business to get additional capital, and so they're looking to sell. That's a typical buy for a private equity fund, so we're seeing those type of deals. We're seeing lots of strategic transactions, so those haven't actually deteriorated the way we would have thought. Where a company is buying a competitor, we're seeing those types of deals happening. Where a private equity fund owns a portfolio company and that portfolio company is doing an add-on transaction, we're still seeing that activity in the market.

SS (15:17): Yeah. I would echo that. I think there are two types of deals we're seeing right now. One is deal flow in industries that are not impacted by the pandemic or maybe thought of as being beneficiaries. One example would be the acquisition of the video platform BlueJeans by Verizon, which although it was in the works pre-COVID, was reportedly accelerated due to COVID.

SS (15:42): The other type of transactions that are going forward are, in summary, deals that don't require debt or don't require a lot of debt. That's small enterprise value transactions and add-on transactions that private equity players can execute just with equity without requiring lending commitments.

GB (16:05): Stefan raised an interesting point on lending. What we're seeing is we're seeing that the traditional lenders are willing to increase their debt facilities for add-on transactions, and so private equity fund buying a new business, they can get additional debt to do an add-on acquisition. If the lending syndicate needs to add in another party to the syndicate, they'll do that. We really haven't seen an issue there.

GB (16:32): There is real speculation in the marketplace. What happens when there are going to be new platform acquisitions, so a brand new business, and you have to put a new syndicate of lenders together, and will they be there? It may be more difficult for private equity funds to access debt capital for new platform transactions, not impossible. It's going to be there, but it's just going to be tougher. I think we're going to see the lenders have more aggressive terms. There may be more aggressive pricing. Certainly, they're going to want to do more due diligence than they have in the past.

SS (17:07): I think we've seen, in the immediate aftermath of the crisis hitting, virtually a shutdown of the lending markets for new deals. In the last couple of weeks or so, we've seen a little bit of easing up in the high-yield market and in the terminal B market but at pricing that, comparatively to pre-crisis levels, is expensive. I think private equity players will think carefully about whether or not they want to avail themselves of those sources of capital.

SS (17:38): Then there is, obviously, another factor. Private equity requires debt to do deals, at least at the higher levels, but the other thing that's tricky right now is private equity is still a handshake industry. Even if debt is available, many, many deals require personal contact and people getting together to build trust and for a private equity sponsor to build a relationship with a management team. Obviously, given all of the current restrictions on travel, social distancing and whatnot, that's very difficult to pull off.

RG (18:16): Given that you are seeing lenders somewhat reluctant to lend into new deals, are there other sources of capital out there that private equity sponsors can or could draw on?

SS (18:26): That's a really excellent question, Rudyard. Two quick points on that. Number one, private equity sponsors are sitting on record levels of dry powder, so as a general proposition, it should be easier for them to deploy large chunks of equity into deals and to take on less debt for particular portfolio investments.

SS (18:46): The other point I'd make is that this situation, lenders being more reluctant to lend, may present an opportunity for LP co-investments. Many limited partners are actively seeking opportunities to invest alongside sponsors into portfolio investments on a no-fee and no-carry basis because, remember, when they come through the fund, they pay these fees. This may just be the piece to the puzzle that gets some deals off the ground, capital from LPs on a basis that doesn't attract the typical fees charged by private equity.

GB (19:21): Yeah. No, Stefan, I totally agree that we may see co-investors as the missing capital piece in transactions. We are seeing, particularly in the U.S., some private equity sponsors saying, "We're going to underwrite the entire purchase price with equity, and if we can get debt by closing, that's great, and if we have to do it six months later and then do a dividend recap, then we'll do that as well."

RG (19:48): Yeah. That's a great insight. Let's talk a little bit, as we move to the conclusion of our conversation, about exit activity because this is clearly going to change as a result of a lot of the stresses that we've just been discussing that the private equity industry is facing.

RG (20:05): Guy, what's your sense of how you see exit activity evolving to deal with this fast-changing environment?

GB (20:17): I think we're going to see two things. I think private equity funds that own businesses that were getting ready to be sold, I think a lot of those funds are going to pull their deals because the market's not right, but on the buy side, when other people are selling, I think we're going to see deals look a little different than they did in the past.

GB (20:34): I think we're going to see... This is, again, going back to the 2008, 2009 playbook. Everyone has that historical context, and I think it's giving private equity players more conviction to do deals in this market. The deals may look different. I think we may see convertible prefs or convertible debt deals. We may see deals with earn-outs. We'll probably see lots of PIPEs, so private investment in public companies. Deals won't be the traditional, "We'll buy the company and put a bunch of debt on it and pay a really high price." I think deals are going to be more creative for the next six or seven months.

RG (21:12): Stefan, what's the view in the U.S.?

SS (21:15): Yeah. I think exits will inevitably drop and holding periods for some assets will extend as sellers sit tight and wait for the markets to turn around a little bit, but the activity may not fall off just as much as it did in 2008 and 2009. One of the reasons for this is that the 2008-9 vintage entailed a lot of younger, not fully mature companies, and that's different this time around. We've been through a long boom cycle, as Guy has described, and there are lots of companies that are still ready to be sold. When liquidity flows again, when lenders lend again, and when deals can be done, handshakes can be had, I would expect that we're going to go back to decent deal flow relatively quickly just because there are a good number of companies in the pipeline that are ready to be sold.

RG (22:16): Stefan, give us a sense of what we're seeing in terms of the fate and future of pending transactions that were struck before the COVID-19 crisis.

SS (22:28): Yeah. That's an interesting question, Rudyard. Unsurprisingly, buyers are trying to get out of deals that were struck before COVID given COVID's impact on the target industries. One example that's been followed closely here in the U.S. is the deal between the private equity firm Sycamore Partners and L Brands under which Sycamore was going to buy a 55% stake in Victoria's Secret. That deal was signed late in February and, just two months later, Sycamore was in court suing L Brands to get out of the deal. It's an interesting transaction. It's an interesting court case.

SS (23:07): The parties have now settled and abandoned the transaction, but what's interesting about this particular deal and this particular litigation is the argument that Sycamore Partners advanced in court. Sycamore didn't focus on the material adverse effect clause, which is sort of the stop-gap in many M&A agreements, but it did argue instead that Victoria's Secret and L Brands had violated what is known as the ordinary course covenant. That's a provision in most M&A agreements that require a target to basically stay the course between signing and closing a deal, and that's essentially intended to prohibit value-destructive behavior on the part of the target or the seller.

GB (23:55): Yeah. What we're finding is that, in non-ordinary course times, it's very difficult for companies to operate in the ordinary course, and so, on a go-forward basis, I think lawyers and private equity professionals are really going to hone in on that provision and we'll see what has been a really standard clause in agreements start to change drastically.

RG (24:20): Well, Guy, Stefan, I want to thank you both for a rich, detailed conversation that I think helps all of us better understand the challenges that private equity is going to face over this period of time but also some of the real opportunities that will be presented to this industry and presented to businesses, generally, who can access private equity as a partner to build growth, to enhance productivity, to get us on the path to the type of economic recovery that we're all hoping and expecting in the months and in 2021. I want to thank you both for coming on Torys Business Brief and sharing your analysis and insights today.

GB (25:01): Thanks for having us.

SS (25:02): Thank you having us.

RG (25:28): Now we shift from private equity to looking at how government wage subsidy and support programs can help Canadian businesses during the COVID-19 pandemic and beyond. As a partner in Torys' Tax practice, Gwen Watson has been helping clients navigate these programs.

RG (25:50): Gwen, welcome to Torys Business Brief.

Gwen Watson (25:53): Oh, hi, Rudyard. Thank you for having me.

RG (25:56): Well, I'm looking forward to this conversation. Just to begin, what is the key piece of information or the problem that your clients are wanting your help in trying to figure out when it comes to accessing these programs and using them in an efficient and effective way for their businesses?

GW (26:14): So far, a big question coming from clients is, "Do I qualify for the wage subsidy?" There are a number of conditions that have to be met in order to qualify, but I think maybe even just stepping back a minute, the wage subsidy is obviously a big piece of the Government's COVID-19 economic response plan. Really, the Canada Emergency Wage Subsidy has three main objectives. Obviously, the first is to prevent further job losses. It's also to encourage employers to rehire workers that have been laid off. The third part of it is to help better position employers to more easily resume normal operations following the COVID-19 crisis.

GW (27:08): In terms of eligibility, there are three basic conditions that have to be met in order to qualify for the CEWS. The employer has to have a payroll account as of March 15th. The employer has to satisfy the decline in revenue test. The employer has to be so-called an eligible employer, and that includes individuals, corporations, trusts, certain partnerships, registered charities, and certain tax-exempt persons, but it excludes what we call public institutions, and that includes things like government entities such as Crown corps schools, public universities, and hospitals.

GW (27:55): I think my colleagues may have mentioned, particularly in the PE space, often, partnerships are, I think, a fairly common vehicle, and certain partnerships can qualify for the CEWS, but in order to do that, each direct or indirect partner has to be an eligible employer. What that means, from a practical perspective, is one needs to go through and look at each of the partners and, if there are partnerships who are partners in the lower-tier partnership, you have to look at the partners of the upper-tier partnership and basically go through and see if any of those entities are public institutions or certain types of tax-exempt entities. If so, the partnership may be ineligible for the CEWS.

RG (28:43): Oh, that's interesting. That, again, would cause some challenges for a lot of private equity companies.

GW (28:52): Yeah, practical challenges just in terms of getting the information that you need and crunching through that.

RG (29:00): What are you seeing, Gwen, in terms of, when businesses are accessing these government supports, are there other tax considerations that they should have in mind in terms of their financial planning, in terms of how these subsidies affect their companies from a tax perspective?

GW (29:21): Yeah. From the perspective of the wage subsidy itself, it actually is a taxable inclusion for the employer if they are eligible to receive the subsidies. That's something to keep in mind, I guess, for next year's taxes is that amounts received under this program will be taxable in Canada.

RG (29:44): Right. I guess when you're working with clients and they're thinking about this ratio of a 75% subsidy but the requirement, on their part, to continue to provide 25% of the funding for that position, is that presenting a challenge for clients or, generally, are they seeing this as a proposition that makes sense for their business?

GW (30:10): I think the latter. I think, as you mentioned, the wage subsidy is intended to cover wages up to 75% of an employee's remuneration up to a maximum of $847 a week. The government has certainly urged employers, to the extent feasible, to top up the 75 back to pre-crisis levels.

RG (30:40): Do you foresee that these programs will potentially have demand beyond the limited time horizon that they are, in fact, available to employers? In other words, are you seeing people accessing these programs with the idea, absolutely, of retaining that talent? I guess their ability to retain that talent requires on demand and business coming back in the future, allowing them to go off the subsidy and take on the full-time cost of that employee.

GW (31:14): Yeah. Right now, in the legislation, the program itself is expected to run for 12 weeks from March 15th to June 6th. There is some flexibility in the legislation, however, for the government to extend that period until September, so my guess is they may revisit the term of the program in the coming days.

RG (31:39): Well, Gwen, thanks for this, great insights for us to share with our audience so that we're all up to speed on these policy responses and, hopefully, taking advantage of them, where appropriate, to make our businesses and business activities all that more resilient. Gwen, thanks for your time today.

GW (31:57): Yes. No, thank you.

RG (31:59): Well, that wraps up this episode of Torys Business Brief. You can read more on some of the issues we've discussed in the Torys-authored paper "COVID-19: The Canada Emergency Wage Subsidy". You can find this essay by visiting

RG (32:18): On our next podcast, we'll speak with Torys Calgary partners Stephanie Stimpson and Chris Christopher who will discuss how the oil and gas industry has been affected by COVID-19.

RG (32:51): Thanks for listening to Torys Business Brief. I'm your host, Rudyard Griffiths.

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