All around the world, private equity firms are scrambling to adapt to the new environment caused by the rapid spread of the coronavirus.

Many countries, especially in the developed world, have shut down large parts of their economies to halt the virus’ spread. The resulting global recession will strain companies that private equity firms own.

Coronavirus and Private Equity

The fact that private equity funds use a lot of leverage when buying target companies will likely exacerbate cash flow issues. Businesses will likely see cash flow decline rapidly. More than 75% of deals by PE firms in 2019 included debt multiples higher than six times earnings before interest, taxes, depreciation, and amortization (EBITDA).

That level of leverage will cause problems for many portfolio companies purchased in recent years.

Private equity funds in Europe and the United States are reviewing their portfolio companies to assess the damage. In many cases, portfolio companies have drawn down their credit lines to increase short term liquidity. The managers of the funds are having talks with their lenders to discuss refinancing. Debt restructuring is also on the table for portfolio companies.

Other PE firms are buying back the debt of the companies in their funds. Apollo Global (US) has repurchased debt across its portfolio and called in some of its dry powder to buy back debt and supply companies with liquidity. The shops would have used this capital in normal times to finance new deals. However, the shifting economic landscape due to coronavirus requires them to help portfolio companies weather the storm.

Once the economic triage is completed and coronavirus has passed, it will be time to go deal shopping.

Valuations plunged across the world. More favorably priced opportunities exist now than during the start of 2020.

Related: Private Equity: Big Changes Are Coming to the Industry, Says Tim Melvin