Patrick Galleher is the CEO of Boxwood Partners, an investment bank in Richmond, Virginia, where he leads sell-side transactions.
There’s always a certain degree of risk inherent in any investment. Of course, you can’t let that stop you from moving forward. The trick is balancing that risk against the market and understanding what that means in the current economic climate.
Before 2020, it felt like the worst that could happen was a recession. Now, investors have to worry about the potential disruption of a pandemic, as well. The outbreak of the pandemic in the spring forced many companies to close their doors to comply with shutdown orders, and businesses struggled to generate profits.
With so much of the market in a state of flux, it can be difficult to identify which investments are right for you. The Great Recession can provide important clues for investors searching for a recession-resistant investment. Bear markets require startups to buckle down and get innovative if they want to succeed. For example, Airbnb, Netflix and Mailchimp all thrived during times of economic struggle because they pivoted their business models or focused on a unique service.
In this unprecedented time, investors need to focus on companies that thrived during the initial two months of the pandemic. Private equity firms are willing to pay for companies who performed well during the shutdowns. This makes identifying a resilient investment more important than ever. In a July survey of 142 private equity firms by S&P Global Market Intelligence, 58.5% planned to make selective new investments to capitalize on low-asset valuations in certain sectors despite the pandemic. Private credit continues to grow in popularity, as 35% of surveyed firms increased their use of these loans in the past three years, and almost half now use private credit as much as bank financing for buyouts, according to a report released in December by law firm Dechert LLP and Mergermarket, a market research firm.
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Portfolio diversity is especially important during this time — it’s never a good idea to put all your eggs in one basket. During any recession, corporate profits shrink and investors sell stocks, which pushes the market lower. Yet, not all companies decline at the same rate and having a diverse mix of investment options will help minimize your risk. Now is not the time to make sweeping changes to your portfolio, but making sure your portfolio focuses on stable, pandemic-resistant investments can provide an opportunity for growth.
Here are a few things you should consider when identifying a pandemic-resistant investment in your area.
Essential Services Are Always Needed
As I touched on with my previous article, there are some investments that always make sense, no matter what the situation may be. Chief among these are investments and businesses that offer essential services. These include home services businesses, auto mechanics and healthcare providers. While gyms, restaurants, bars and hair salons closed during shutdowns, other businesses thrived. Grocery stores, liquor stores, delivery services and gardening suppliers all fared well last spring, according to the U.S. Chamber of Commerce.
Customers Boost Digital Footprint
The pandemic introduced many of us to online food delivery, curbside grocery pickup and Zoom business meetings. Mobile services continue to gain in popularity, and it’s a model adapted to thrive both during and after the pandemic.
Even as the vaccine rolls out, these new technologies and conveniences are here to stay. Technology companies have been outperforming other sectors of the market during the pandemic. Investors who remember the dot-com bubble in the late 1990s and are wary of investing in technology may be missing a great opportunity. Savvy investors are turning to companies that are offering digital services to banking, healthcare and retail.
Drive-Thru And Contactless Options Are Key
If there’s one feature that has offered many businesses a much-needed lifeline during the pandemic, it’s the drive-thru. What was once a point of convenience has now become the primary mode of service for many businesses.
Features such as curbside pickup and contactless service have become popular at many retail outlets. It will prove crucial for businesses to ensure customers at least have the option for some kind of contactless service if they hope to survive post-pandemic.
Avoid Crowds And Consider Teleworking
From concerts to restaurants, it’s unlikely we’ll see people comfortable standing shoulder to shoulder anytime soon. This makes it difficult to recommend any business model that requires a crowd to be successful. Business models predicated on person-to-person interaction have a long road ahead of them.
In addition, the onset of the Covid-19 pandemic kicked remote work into high gear, and businesses across the world are ditching office space. Beyond the rent for your space, there are also utilities, insurance and other expenses to take into account. You should look at how essential having an office is to your investment and if it can continue business as usual without one, should a lockdown come.
Keep Calm And Invest Wisely
While everything may feel a bit upside-down right now, it’s also important to remember to “keep calm and carry on.” At the end of the day, the person who best understands the level of risk you’re willing to handle is you.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.