How are PE Firms Gearing Up for a Potential Recession?

 Private equity is one such sector that has endured the adversities of the COVID-led economic downturn quite well, compared to any other industry. Since the great recession of 2008, private equity in the US, had been on an alert for facing a situation just like this. Remember, that the year previous to 2020 had been highly successful for private equity wherein, it raked in $800 billion in varied deals. It’s literally sitting on a huge pile of dry powder.

As per a recent Statista survey, financial services sector, and especially, private equity, had been found among the least-affected in terms of bearing business loss and facing the heat of the corona-led crisis. While, the worst-affected business domains were the manufacturing, and travel.

Preparation Measures Enforced by the PE Firms Against Economic Slowdown

Cautious Selection of Industries to Invest Into

PE firms, in the times of the corona pandemic, have started refocusing on non-cyclical industries that are less vulnerable to any form of financial crisis situation. Their key targets, at the moment, are industries that are recession-proof. And that’s the sole reason for their soaring interest in buying stakes at technology firms, or the companies in the business services sector.

The top private equity firms are completely avoiding the highly-vulnerable retail and energy sectors as per a heavily-brainstormed investment strategy plan amid recession.

Expert Advisory is Being Leveraged Optimally

US private equity firms, in the times of the current COVID-led crisis, are continually seeking expert guidance. In the last six months, each investment decision taken by the private equity industry in the US, had been finalized after a prolonged discussion with the industry advisors.

Portfolios across a range of industries are being managed with extensive care, while taking in loop the experts of the respective industries. By concentrating on the portfolio-management now, the best private equity firms are ensuring to keep the solutions ready, in case, the pandemic lasts longer than expected.


COVID-19 impact index by industry - minor (1) to severe (5) in 2020

Source: Statista

General Partners (GPs) are Rising Up to the Occasion

GPs, that are the key administrators in a PE firm, are busy strengthening the balance sheets of their respective firms, at the same time, cross-verifying the skillset of investment & operations teams, as preparation to the future challenges. Recently, efforts have been made by private equity investment professionals who are working as general partners, to soar up the permanent capital, as a safety precaution to liquidity-dearth.

PE Firms are Amping up Capital-Lending

Private credit strategies are among the most beneficial to PE firms in the times of a crisis, given the limited partnerships they are able to buy in distressed companies to whom they lend the money to. In the long-run, the returns received out of this limited partnership fund model are huge. The strategy is beneficial for both the PE firm, and the company borrowing the money in return for a limited partnership offer.

PE Firms Seeking Opportunities to Mindfully Deploy Dry Powder

Given the number of limited partners (LPs) that a PE firm these days constitute of, there gets collected a huge pile of cash ready to be deployed in new investments. The contributors to the liquid capital that the PE firms hold, comprise sovereign wealth funds, institutional funds, family offices, and the high net worth individuals.

PE funds, currently hold $1.4 trillion that is instantly deployable. Adding the funds collected from other asset classes, i.e. real estate, infrastructure, credit, and growth capital, it soars up to a whopping $2.6 trillion.

Concluding Thoughts

It’s true that there exists a dearth of employment opportunities in private equity amid the ongoing pandemic. There is almost zero availability of private equity jobs at the moment. But, the said sector has managed the crisis with a seemingly less strain. PE, after the great recession of 2008, has evolved into a much mature, and a better-resourced sector with a better sense of fighting a financial crisis situation.

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