By Benjamin Horney

Law360 (August 28, 2020, 1:03 PM EDT ) In this installment of Coronavirus Q&A, the co-leader of Fox Rothschild's mergers and acquisitions practice discusses the continuing effects of the pandemic on the state of the market for M&A and private equity investments, and he explains how COVID-19 has affected his day-to-day personal and professional life.

Matthew Kittay, a partner at Fox Rothschild LLP who works in New York, is national co-chair of the firm's M&A practice group and chair of its New York corporate team. He shared his perspective as part of a series of interviews Law360 is conducting with law firm practice leaders about the wide-ranging fallout and effects of the coronavirus crisis.

This interview has been edited for length and clarity.

From your perspective, how has the coronavirus pandemic impacted the state of the M&A and private equity industries at large?

There was a lot of private equity dry powder going into this. The pandemic really came out of left field. It wasn't based on any rational, regular problem in the market that anyone could have forecast, and it wasn't a one-quarter blip.

Still, there's general positivity and optimism in the market for the private equity funds and other deal makers we work with. They've continued to look at opportunities and put money to work, more or less at the same pace. In some cases, they're maybe looking at slightly different industries than usual, and if they already have money deployed in strong companies, they're continuing to invest in those companies.

There are definitely clients prepared to go into bankruptcy. Depending on the industry, some are really in a pinch. Companies in travel or dining, for example, haven't been able to pivot to doing at-home business. For other areas, though, like cleaning and consumer products or online delivery platforms and mobile solutions, it's been very robust.

How has the coronavirus affected the Fox Rothschild M&A practice, both at first and in the many months that have passed since all this chaos began?

Everyone is pleasantly surprised that the firm's metrics have remained very strong, no matter how you look at it — whether it's hours, dollars, fee collection, etc. The numbers that partners receive on a monthly and quarterly basis don't show much material disruption.

The pandemic really hasn't impacted us as much as much as you might have thought. We've continued to hire and expand our practice areas. We have strong practices in some unique areas. For example, cannabis is an area I'm really active in. It was designated essential in most U.S. jurisdictions and got very busy. It enjoyed the bump you saw in consumer staples, with people hoarding and pre-stockpiling. It also enjoyed the essential designation, so companies in that area were allowed to keep stores open and continue producing during the pandemic.

In some respects, we got lucky in having a broad client base with spread-out risk. Health care is another area where we have a strong practice that kept really busy when the pandemic hit.

What are some of the major issues that deal-making clients are grappling with at this point in the pandemic?

Future uncertainty. Uncertainty is always bad for the deal markets. We already had a year of uncertainty coming up with a highly contested election, plus changes in related tax policy and strained cross-border relationships with other economic super powers. So there was already a lot of strain on the deal markets related to uncertainty — notwithstanding some certainty-providing tailwinds, like low unemployment, a strong domestic market and high capitalizations for companies — but when COVID hit you lost a lot of that certainty with job markets and the stability of capital markets. So I just think that uncertainty is the main issue clients are grappling with right now.

Are there any provisions or clauses that are being included more often in deals that are specifically related to the pandemic?

There are some obvious ones when it comes to provisions, like force majeure, which is the description of an unexpected, cataclysmic event. Then you have material adverse effect, or material adverse change, clauses, which are always very heavily negotiated. 

Now though, there's the question of which parts of the COVID pandemic are baked into the deal and accepted. That includes whether or not declines from the negative aspects of COVID, such as decreased consumer demand or a breakdown in the supply chain, are attributed to the pandemic. Is that a known or unknown risk going into a deal?

Meanwhile, people are concerned about whether there's going to be a second wave of the virus, what the impacts of that would be on workforce productivity, and how that risk can be dealt with in an agreement.

Additionally, earn-out provisions are another big one. They are typical in a private equity deal, because the private equity sponsor wants to make sure future performance looks like, or exceeds, past performance. So they often hold out economic incentives in the form of an earn-out clause.

Early on in the pandemic, there were questions about earn-outs that had been struck prior to COVID. A lot were re-negotiated. It just didn't make sense to keep those clauses as they were, because there was no way to hit the targets outlined, even if a company was doing a great job. Now, for earn-outs struck post-COVID, the question is how you account for the pandemic now, knowing it gets baked in.

Are there any types of transactions you are working on with regularity during the coronavirus chaos that were less popular when we weren't in a pandemic? For example, private investment in public equity, or PIPE, deals gained popularity in the early days of the pandemic, and there's definitely been an uptick in deals involving special purpose acquisition vehicles, or SPACs.

There's definitely been an increase in SPACs, but I think many of those vehicles were already in the world pre-COVID. It's happening, but I don't think it's happening as a result of COVID. That's just my two cents. We are certainly seeing a lot more SPACs.

In the wake of the pandemic, we've done reorganizations, spinouts and divestitures of nonperforming and distressed assets. We've expected to see more distressed deals, and, frankly, bankruptcies too. I think that hasn't happened yet because of the timing, maybe. 

Summer was coming right up, and people wanted to wait to see the extent of the pandemic. They wanted to see if there would be enough support from the federal government in the U.S. to keep things propped up for a bit. I do think you'll see more of that before this is all over.

You've been in practice during multiple major economic downturns. What is different about this one and how it has affected the market for deals?

This one affects different industries, and more starkly. It doesn't feel like it has trickled down, which is what happened in the 2008 global financial crisis. There, these very abstract financial products caused all of this trickle down, where in this case it feels like it's the other way. It's hitting certain aspects of the consumer markets, like travel and dining, and then filtering up. 

A lot of white collar workers kept their jobs initially, and maybe were even hit with the halo effect, because they didn't have anything to spend their income on. There was nothing to consume. That's kind of working its way out. In this case, those quickly hit the hardest were people in service industries that might not have safety nets. There are a lot of people in the gig economy who are not part of a technical workforce — contractors in the sense of Uber drivers and those sort of things — and the damage to them in this downturn was sharper and spread much quicker unfortunately. 

Maybe that means it can come back faster. As soon as people feel comfortable traveling and dining, there can be a robust economic recovery. Also, perhaps a result of this will be strengthened workforce protections for those marginalized gig economy workers. Hopefully there will be more positive legislation on that front.

How has your day-to-day personal life and work life changed since the coronavirus outbreak? 

My wife and I stuck it out in New York City in a small apartment from March until the middle of July. Then we had a kid — we had that planned before March 2019, obviously — so we took some time off in the summer. We went from an 800 square foot apartment in Manhattan to renting a house outside of the city for the rest of the summer.

In the apartment, we didn't have enough space to have two working from home offices. Now we do. 

I manage a team of 15 corporate attorneys in New York, and a lot of that management was done remotely anyway because we have a very strong tech platform. So my work life is not that much different. What people miss the most is having the option to come in and see each other. Normally, if I'm not traveling, my default is being in the office, so you can go see colleagues and have casual social interactions.

How do you usually unwind outside of work, and how has that changed in the wake of the coronavirus?

We're New Yorkers, so we're used to dining out, going to bars with friends, concerts and sports events and other live entertainment. Now it's more things like family time and virtual catchups with friends. It's probably a little healthier. Earlier nights and more sleep, less socializing.

--Editing by Rebecca Flanagan.

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