A paper published this week did what PE pros and journalists like us have been doing for the last few years: considering what will trigger the next downturn and how private equity firms and funds will fare. Why private equity can endure the next economic downturn from big four consultancy EY does a thorough job of showing how the industry has changed since it faced the global financial crisis.
Written, as it was, before President Trump shocked the world on Wednesday night by banning travel from Europe to the US, the paper gives a refreshingly panic-free perspective on an impending downturn. It notes that slowing Chinese growth, the US-China trade war, Brexit issues and coronavirus are all creating “a picture of increasing uncertainty”.
Uncertainty, of course, is now here in spades. Covid-19 is spreading at such a rate that to note the number of confirmed cases at the time of writing (134,000 on Thursday evening) seems like a futile exercise.
Travel restrictions have largely put deals on ice; Brookfield’s pulled process on a A$2 billion ($1.3 billion; €1.2 billion) Australian infrastructure asset is a significant example. As one buyout exec told PEHub this week: “No one wants to launch during this thing; no one can actually go meet with management teams.” It’s too early to tell if any fundraising processes will fall over, but they likely will.
The EY paper raises two important points.
First: private equity firms did not buy enough in the depths of the global financial crisis. “In hindsight, the industry missed a significant opportunity to acquire high-quality assets at deep discounts,” note the authors. As another senior exec once described to PEI: “We should have loaded up on anything that moved, and we didn’t.” Expect sponsors to be more active through this crisis.
Second: private equity 2020 is a different beast to the 2008 model. It has more dry powder at its disposal (an estimated $1.4 trillion); it has the experience of GFC to draw on; it has more widespread operational experience in house; it has a far deeper and more flexible secondaries market, and greater access to data from a wider range of portfolio companies. These attributes suggest that private equity will prove its worth to institutional portfolios during the upcoming turmoil, as it did during the GFC.
However, PE is also under greater scrutiny today than it once was, as our cover story this month details. As an industry it has a job to do to persuade politicians and the public of that which its investors already know: that it is a responsible steward of companies and jobs. This current crisis has a much more human face than the GFC. Businesses will face unprecedented operational challenges and many workers will find themselves financially disadvantaged. If private equity-backed companies and their workforces – benefiting from a superior ownership model – come through this better than those under other forms of ownership, that’s a pretty strong validation.
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