Private Equity Buyouts Will Surge This Recession

Private equity firms are likely to step in to save the businesses facing the brunt of coronavirus outbreak. Experts believe PE firms buyout will increase if a recession follows. Here’s why.

Will Private Equity industry be better prepared, in case of a downturn? Most industry-voices feel, yes. Why? The reason lies in the Global Financial Recession of 2008.

The international financial meltdown was the greatest test to date for Private Equity industry.

If the đź”—ongoing coronavirus crisis precipitates into another recession, the chances are that PE firms will be quick to make additional investments in stressed companies and collect the assets the hedge funds and mutual funds are forced to sell.

Furthermore, even though Private Equity will face troubles in refinancing their portfolios and executing new deals, the businesses backed and acquired by them will have better odds of survival than others.

In 2008, the PE-backed companies suffered fewer defaults than businesses not backed by PE firms, says Peter Witte, Global Lead Private Equity Analyst at Ernst & Young.

Here is a quick lowdown of why PE backed acquisitions are expected to rise in this recession and why PE buyouts perform better during tough times.

Why do PE buyouts increase during a market downturn?

The evidence of PE firms acquiring more companies, and those buyouts yielding high-performance levels can be taken from 2008 recession. The reason for this correlation is:

👉Compared to an independent business unit or an average corporation, 🔗Private Equity associations and top PE firms usually have strong relationships with financial institutions, such as banks and non-banking entities. It improves the credit flow.

👉Secondly, right from the beginning, PE firms are hyper-focused on survival of their portfolio businesses. This attitude insulates their businesses from market fluctuations and set them apart from companies struggling during the crisis.

👉Finally, Private Equity backed companies have access to a range of experts. 🔗Professionals at private equity are well-connected and have decade-old relationships with experts across industries and geographies. These ties, fostered over the years, prove invaluable during crisis times when large corporations are in dire need of operating expertise. From supply chain issues to communication troubles (as witnessed in COVID-19), most PE portfolio companies have all the help they need at their disposal.

So, how vibrant will PE buyouts be this year?

They need to be prepared in advance. One of the takeaways of 2008 Recession for PE professionals is not to be passive in deploying new capital for buyout. Witte expects PE industry will be more aggressive this time around.

Looming Recession: How will PE firms act this time?

Crisis usually presents one of the best buying opportunities of all time for PE industry.

Provided the GPs and LPs are not at wit’s end and playing overly cautious, one can court extraordinary deals.

At the beginning of 2020, private equity industry had enough dry powder ranging in USD 2 trillion. đź”—PE professionals can put these amassed funds to good use, lest the post-coronavirus recession becomes a reality.

As asset managers in other financial institutions, including hedge funds, mutual funds, and others are forced to sell their holdings, PE firms can become the BIG ACQUIRERS.

Consulting firms expect dry powder in large PE funds will be used for distressed, direct, and special situation landings.

There is an opportunity for the private equity industry on the other side of the market volatility.

A Word of Caution

Can this model of private equity industry restructuring business be relied upon?

The problem with such reformation of markets is its never pretty. The buyouts are often followed by layoffs, furloughs, severance pay, selling unprofitable divisions, and other such measures that may look ugly, but are typically inevitable for companies to survive struggling to survive. Businesses are quite vulnerable to earning long-lasting ill will in such times. However, a PE acquisition can perhaps be the best bet for both employees and management.

If the post-COVID-19 world brings a downturn and recession, PE firms are highly expected to help companies sail these headwinds and make difficult decisions.

đź“« My other Stories on Private Equity:

  1. Coronavirus Impact on PE Markets: How to Neutralize Risks?
  2. Understanding Private Equity and its Education
  3. 5 Questions Private Equity is Asking about Coronavirus

Sr. Financial Advisor at PageGroup, New York.

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