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5 Private Equity Predictions in this Recession

Posted on March 26, 2020 at 2:25 PM


According to the Global Private Equity (PE) Report 2020 by Bain & Company, uninvested PE funds - "dry powder" - hit a record high of $2.5 trillion in December 2019. More than half of it sits in North America. What will happen with PE firms, and their massive reserves, during the coming recession in the United States? Here are five predictions based on my reading of the latest Bain report.


1 - PE Firms Planned for this Recession - Most PE general partners believed the economy had peaked (57%) or already entered recession (14%) when surveyed in December 2019. While PE firm leaders may not have foreseen the speed and cause of this Coronavirus recession, many had plans for when the recession hit. Those planners may be ready to act fast.


2 - Dry Powder to Target Distressed Companies - $830 billion of the $2.5 trillion in PE dry powder is targeted for buyouts, according to the Bain report. Many fundamentally healthy companies that were attractive targets before the Coronavirus will be suffering financial distress during this crisis. Those companies may become less expensive to acquire than they were just months ago. During the 2008-09 recession, for example, EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) multiples of deals that did go through shrank. With an investment horizon of several years instead of several months, PE firms may see attractive buying opportunities.


3 - Dry Powder to Reinvest into Existing Portfolios - Companies within PE firm's existing portfolios are also being hit financially by the Coronavirus impact. These portfolio companies may need cash infusions which may present opportunities to PE firms to increase equity or buy debt. The recession provides opportunities (or needs) to double down on their initial investments where they still see value.


4 - Consolidation to Largest Funds - In the last recession of 2008-09, about 1/4 of private equity funds stopped raising capital. This recession may prove to be similar, especially since the PE market has become crowded and competitive through the last several years. A reduction in PE firms would likely mean less competition for acquisitions, investors, and PE professionals.


5 - Funds Seek Extensions - In the last recession, both the number and average value of buyout deals dropped dramatically for two years before increasing again. PE firms could be left holding years of uncalled capital and may need to seek extensions this time around.


Every industry is being challenged by the economic impact of the Coronavirus pandemic. The Private Equity industry is unique in that is has $2.5 trillion in capital waiting to be used at a time when many places need capital. It makes for an interesting year.



Categories: Private Equity, Financial Services, Crisis Management