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The Coming Equity Shortage

Firms that manage to survive until an effective COVID-19 vaccine is widely available will have a bright future but weak balance sheets. Innovative new private-equity funds, modeled on US special-purpose acquisition companies, could provide much-needed capital – not least in emerging markets.

CAMBRIDGE – Let’s be optimistic and assume that one or more of the 11 COVID-19 vaccines currently undergoing Phase 3 clinical trials are found to be safe and effective by early 2021. Let us also assume that production can be ramped up quickly, so that countries can vaccinate a significant part of their populations by late next year.

In this rosy scenario, the current “special period,” when social distancing severely restricts economic activities – from schools to universities, restaurants to airlines, concerts to sports events, and religious ceremonies to wedding parties – will last only one more year. Once social-distancing measures are lifted, pent-up demand for celebrations, social gatherings, travel, and the joys of human interaction will likely fuel strong recoveries.

But for many firms that already have endured six months of pandemic-induced disruption, one year seems far away. Firms able to survive until then – especially in emerging markets – will have a bright future but weak balance sheets. They will have experienced 18 months of negative cash flows in which their equity will have largely evaporated.

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