THE impact of the Covid-19 pandemic is slowly but surely impacting deal flow in private equity (PE) and real estate globally, asset classes that are normally the last to be impacted by shocks to global markets.

This is a sign that investors are becoming more cautious even when it comes to deploying less liquid, long term capital. PE investors, in particular, are also reviewing relevant legal provisions such as “force majeure” clauses or “material adverse clauses”.

In Asia, the widespread travel restrictions and related quarantine measures, the prolonged shutdown of government offices, and the significant business disruption caused by people being encouraged or directed by their employers to work from home due to the pandemic is having an increasing impact on Asia PE deal activity, according to a report by Mayer Brown’s private equity, funds, and investment management team.

Real estate investors may also have to re-think their usual investment models as supply chain interruptions and the widespread trend towards remote working arrangements triggered by Covid-19 put pressure on the traditional lease-rental-ownership models of the real estate sector.

In the Asian real estate sector, the overall scenario is still evolving with varied impact, depending on the country, market and sector, factors that will influence demand which is changing on a daily basis, says Fergus Hicks, real estate strategist for UBS Asset Management.

In China, real estate investors should be looking at logistics catering to commerce, as well as high-end manufacturing and production since the virus pandemic, coming in the wake of the US-China trade war, has highlighted the certainty that low-end manufacturing is exiting China for other lower-cost countries in Southeast Asia.

In the rest of Asia, the trend towards enhanced mobility and remote working arrangements will also impact real estate investments and developments as companies look to more shared workspaces and technology-enabled buildings, which will free up the long-term lease commitments of many office tenants.

“This is not all good news for office landlords but it does suggest that adopting active leasing strategies to capitalize on the workspaces of the future may bear fruit for pre-emptive office space owners,” Hicks says.

Among other effects are instances of Covid-19 causing delays in closing deals, particularly where transactions require regulatory approvals from government officials whose offices are temporarily closed.

A number of PE investors, particularly in China which has been the epicenter of the pandemic, are also postponing prospective deals particularly where there are difficulties in completing the due diligence process.

PE investors who may be exiting a portfolio company via a sale process are likely to want to negotiate more specific carve-outs from “material adverse effect” (MAE) clauses to prevent events originating from Covid-19 from constituting a MAE. A MAE is a clause found in purchase agreements that can impact a deal’s closing and can have significant benefits for either sellers or buyers, but only if it’s written correctly.

Under the current scenario, some PE investors are seeking to have more explicit language in their MAEs with specific references to Covid-19, epidemics, and pandemics.

Also, PE investors who may be on the buy-side of a sale process might insist on having clear rights to walk away from the deal if the business should suffer materially adverse impact due to Covid-19.

In addition, in the wake of uncertainty surrounding valuations brought about by Covid-19, some PE investors are also looking closely at provisions in the deal documents relating to the purchase price and adjustments to it.