Private Equity Firms Won’t Waste Another Crisis

Private equity firms won’t waste another crisis, EY predicts.

If the pandemic pushes the economy into a recession, investment companies will put money to work a lot faster than they did during the last major downturn in 2008, according to a report published Wednesday by the consulting giant.

The study argued, among other things, that private equity firms will quickly make investments in struggling companies and vacuum up assets if hedge funds, mutual funds and other traditional managers are forced to sell. It’s not hard to see why.

Funds started in 2006, around the pre-recession market peak, returned a median 8.1 percent, while those with a 2009 vintage delivered 13.9 percent.

“The global financial crisis was the first real test of the private equity model. Could they refinance their existing portfolios, not to mention do new deals?” said Peter Witte, EY’s global lead private equity analyst, in an interview with Institutional Investor. “There were concerns at the time. But we saw that PE-backed companies ultimately suffered fewer defaults and invested more [in their businesses] than companies not backed by PE.”

Private equity portfolio companies often have stronger relationships with banks and other lenders than the average corporation, Witte explained. In addition, private equity firms were hyper-focused on the survival of their portfolio companies, including taking market share from struggling competitors, during the financial crisis.

Read the full EY article via Institutional Investor.