The pandemic will also have been particularly significant for the economy and for businesses.
In analyzing the recent financial results of our portfolio companies, I again notice at least three phenomena that arose from the pandemic. On the one hand, the effect has been particularly strong on the results of the vast majority of companies. Most were negatively affected in 2020 and 2021. I am thinking specifically of companies linked to the tourism, restaurant, and hotel industries, but also of most industrial companies. For these companies, the impact was very negative in the short term, but the recovery was strong once things gradually returned to normal – 2021 and, to a lesser extent, 2022, were good years.
A smaller group of companies have been favoured by COVID and by containment measures. They saw their financial results swell in 2020 and 2021, but the return to normal has been rather disappointing for them. This is the case for companies in the food and consumer staples sectors, and most technology and e-commerce companies, etc.
Looking back, I can see how strong the impact was for the majority of companies, both those initially affected and those who benefited. It is said to be careful not to extrapolate the recent past; I believe this is what many investors have done since 2020.
The second phenomenon concerns the impact of the pandemic observed from 2021 on inflation and on the global supply chain. The return to normal after the abrupt interruption of 2020 has caused enormous headaches for companies.
However, when I study the performance of our portfolio companies over the past two years, I see that most of them have had to adapt to supply and logistics challenges by investing substantial sums in their working capital. Many companies have made the strategic decision to significantly increase their inventory levels to protect their business model and ensure customer satisfaction. I see that many companies have seen their free cash flows drop in 2021 and for a good part of 2022.
I also believe that companies that were in good financial health probably stood out during this period when it was difficult and expensive to obtain supplies. This ability to invest will probably have served them to improve their market position against their less financially sound competitors.
The third observation stems from the previous one. After investing substantial amounts in their working capital (inventory and accounts receivable) over the past two years, many companies will likely be able to reverse their investments in the coming quarters by freeing up a significant portion of their working capital. I anticipate that many of our companies will be able to generate significantly increased free cash flow in the coming quarters. These, combined with balance sheets that were already strong, could provide attractive investment opportunities, especially in a context of an economic slowdown and higher interest rates.
Most of us have pretty much forgotten 2020 and the worst of the pandemic, but I believe it will continue to impact the economy and the financial results of many companies in the coming quarters.
