The Post-crisis World: What Changes Are Coming?

The coronavirus pandemic has infected millions across the globe, upended markets and completely altered the business landscape as we know it.

How will the world look post-COVID-19? The question is as broad as the destruction brought by the virus, but Wharton’s Tarnopol Dean’s Lecture held on April 30 provided some insights through the lens of three sectors — health care, finance and technology. The virtual event, hosted and moderated by Dean Geoffrey Garrett, included a panel of three Wharton alums: Alex Gorsky, chairman and CEO of pharmaceuticals and medical devices company Johnson & Johnson; Marc Rowan, co-founder and senior managing director of private equity firm Apollo Global Management; and Andy Rachleff, founder of Benchmark Capital, a Silicon Valley venture capital firm, and Wealthfront, an online investment management firm. Wharton management professor Lori Rosenkopf facilitated by curating audience questions for the speakers. (Watch a video of the full discussion below.)

Finding a Cure

Garrett began by asking Johnson & Johnson’s Gorsky a question that’s perhaps the most relevant in terms of moving beyond the pandemic: “What are realistic expectations about the medical side of the COVID-19 fight?”

“This is a really nasty virus. It’s a smart virus,” said Gorsky. The best opportunity in the midterm, he noted, is for a vaccine or a therapeutic that will treat and slow down the disease in patients who are already affected. “I’m cautiously optimistic that we’ll begin seeing the impact of a medicine in the coming months and a vaccine at some point in 2021.”

Significantly, pharmaceutical companies are not competing with each other in the traditional sense to be first to market with a therapeutic, medicine or vaccine, he pointed out. Instead, “dozens and dozens of companies are working against a common enemy…. It’s a bit of a combination between a moon shot and an Apollo shot, because what usually takes five to seven years is now being [attempted] by multiple companies … in five to seven months.”

In order to make the grade, a vaccine must be safe, effective and scalable in production, Gorsky said, noting that he is confident of an eventual breakthrough because numerous companies are working on the task.

Johnson & Johnson’s trial vaccine has passed safety tests, and its efficacy is being tested in primate models. The next stage is to accelerate the testing in humans and ramp up production to “hundreds of millions and even billions of doses,” he added.

Developing an antibody test kit for home use is “the holy grail,” Gorsky noted. “The challenge right now is we don’t exactly know the level of neutralizing antibodies that gives you protection against the virus.” While more data and information are needed on that front, investigations are also underway to determine the potency of treatments or their durability over time, he added.

A Changed World at Work

During his discussion with Garrett, Rowan from Apollo Global Management noted that he sensed an impatience among people to return to the way things were before the pandemic. “We’re going to learn to live with this in our own way,” he said. “I see people wanting to go out, wanting to go back to work, and I do think we’re going to see a bit of an assumed-risk mentality take place. I think we’re going to see more green shoots of people venturing out and getting back to work.”

However, the world they return to “is going to be different for some time,” Gorsky noted. “Until we get a vaccine out in substantial numbers, we’re going to be living with this disease…. It’s going to be a matter of how we build the confidence of our citizens, of our workers and of society that we can either prevent the disease from occurring, or that we can limit the spread of it in some way.”

“Every business leader in some way is going to be a health care leader going forward.” –Alex Gorsky

Gorsky called for “a global public health system” with the requisite capabilities and resilience, noting that it will be essential “for national security, economic security and many other aspects of our society.”

Business leaders, too, need to rethink their priorities on health and wellness for their employees, Gorsky continued. In that scenario, “every business leader in some way is going to be a health care leader going forward,” he said.

According to Rowan, “some surprising longer-term trends” will emerge as the pandemic makes its way through the economy. “One is [that] business is going to be asked to do more. The government is just not going to be able to fund [some measures],” he said. “We’re already seeing some businesses that are going to provide health testing, protective equipment and a series of services that historically we relied on from government.”

In the meantime, it will be critical “to master things like social distancing, masking and testing,” said Gorsky. He added that he grapples with the question of “how do we get back to work” — not only at Johnson & Johnson, but also in his role as chair of the corporate governance committee at the Business Roundtable and in his engagements with the government. “We’re going to have to maintain a great deal of flexibility as we go through this to make sure that we can respond to future flare-ups if and as they occur, and ultimately continue to protect our employees and society as a whole.”

Fresh approaches will be required across all aspects of work, Gorsky said. “We’re going to have to think very differently about work shifts, and about regions, states and areas of the workplace that may be prioritized based on geographic location. [We will be] thinking very differently about travel, about meetings and about the new virtual work space as well.”

Benchmark Capital’s Rachleff echoed the theme of the virtual work space when Garrett asked him whether a lack of worker proximity or “density” will lead to lower productivity and innovation in a place like Silicon Valley.

“I’m not sure that productivity is going to be hurt that much. Engineers actually prefer this kind of environment,” Rachleff responded. “With regard to office space, I don’t think we’re ever going back to the old version of the office because why do we need to? If productivity is at a high level and innovation continues, I don’t think that you have to be in the company of a lot of other people to drive innovation. I’m not sure we need to have the same kind of offices that we’ve had in the past.”

Red Flags in the Economy

Predictions for an economic recovery have ranged from a so-called V shape, which is a sharp dip followed by an equally sharp recovery; and a U, representing a longer recession followed by a gradual recovery; to an L, where the economy stays flat at a depressed level for a long time. Rowan predicted a “swoosh” or an extended U, suggesting a longer wait for a full recovery.

The Federal Reserve and the Treasury deserve “very high marks, first for speed – much faster than 2008 – and second, for size,” said Rowan of their response to the economic downturn triggered by COVID-19. “To a large extent … they have taken the worst case off of the table,” he added.

“If we don’t preserve the employers, it’s going to be very difficult to keep paying the employees.” –Marc Rowan

However, Rowan pointed out that the current economic downturn is “not a banking problem like in 2008,” where solvency was the issue, but “a capital markets issue and a Main Street issue.” Secondly, the transmission mechanisms the Fed and the Treasury have to reach capital markets through the banks “are not as clean” as required, he said. Small businesses in particular are “difficult to reach with these transmission mechanisms.”

Rowan added that his biggest worry was that landlords are at risk of their tenants missing rent payments. He noted that landlords collect about $130 billion a month from their residential and commercial tenants. While “the vast majority” of residential tenants are paying their rent, that is not the case with commercial tenants, he added. Tesla is among “a growing number of businesses” that are seeking rent relief, according to a Wall Street Journal report.

Missed rent payments have a cascading effect. “When a tenant does not pay a landlord, the landlord does not pay local real estate tax, local utilities or their mortgage,” Rowan said. “Those mortgages are held by community banks. The scale of this is really troublesome.”

Rowan noted that while the stimulus programs have provided substantial funding for the health care system and for protecting employees, they have largely overlooked protections for employers. “If we don’t preserve the employers, it’s going to be very difficult to keep paying the employees,” he said. If their business fortunes don’t look up sufficiently, “the utilities are going unpaid, the insurance is unpaid, the rent is unpaid, and these businesses are just not going to reorganize,” he added. “And so using them as the transmission mechanism for employees is probably not the smartest thing.”

Rowan pointed out that instead of relying on banks, large businesses borrow directly from the capital markets. Their needs have been taken care of by the Fed and Treasury, which “have absolutely opened the capital markets for any solvent, creditworthy borrower.”

Small businesses, too, borrow from the capital markets, but indirectly through the securitization market, he noted. “Loans are gathered, packaged and securitized, [but] the securitization markets are still shut,” he said. “The ability to support small business, even solvent small business, is tenuous at best.”

“The data shows that the economy has absolutely nothing to do with the likely long-term impact of a business.” –Andy Rachleff

Rowan explained why the government needs to walk an extra mile to help small businesses. “The ones I’m talking about are the 30 million small businesses that will never be good borrowers, who had a month’s worth of cash on hand or two months’ worth of cash on hand…. Those entrepreneurs put their life savings into their leasehold improvements, they failed to make the April rent payment, and they failed to make the May rent payment. And those businesses are really at risk. How we reach those can only be done through government programs because they’re not creditworthy borrowers for the most part.”

New Openings for Entrepreneurs

The pandemic has brought opportunities in select business spheres. Garrett noted that mobile payments are more popular in China than in the U.S., and he wondered if the pandemic would provide that business “a dramatic takeoff, precisely because it needs less human touch.” Rachleff agreed that COVID-19 has accelerated the move to mobile services. “If it continues on its current path, it will represent a huge part of the economy,” he said.

The pandemic is also making way for “the adoption of online banking or a next generation of banking, and a next generation of investment management,” said Rachleff. “Digital banking is going to be an enormous force.”

The big opportunity now is to provide liquidity to companies that need it, Rowan said. He noted that Apollo Global Management has in recent weeks concluded several “private equity style transactions that involve private equity skill sets, but are not classic private equity deals.” He pointed to two recent deals – a $600 million investment in travel services company Expedia and $300 million in printing services company Cimpress that caters to small businesses. Both companies face challenging times in the pandemic’s fallout. “One can get really nice returns and be a provider of liquidity to the marketplace,” Rowan said.

It is too early in the current cycle to find good opportunities to buy companies with private equity, Rowan noted. However, “there will be some opportunities in distress” in time to come, he added.

Rachleff said the current times might actually be good for entrepreneurs. “The data shows that the economy has absolutely nothing to do with the likely long-term impact of a business,” he added. “As a matter of fact, starting a business in a bad economy is a great idea because it lowers your cost of doing everything.”

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