9 minute read 27 May 2020
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Why PE firms are well-prepared to recover and resurge from this crisis

Lessons learned from the Great Recession help position PE firms to support companies in a time of massive disruption.

Private equity (PE) firms have been preparing for some sort of recession for the last several years. However, few could have predicted the economic impact of a global pandemic. As PE firms wait to see what shape the economic recovery takes, they remain confident in the lessons they learned from the Great Recession more than 10 years ago, and in their ability to adapt and respond to today’s challenges.

During the global financial crisis, PE firms missed an opportunity to put more money to work. The PE model has evolved since then. Will PE make the same mistake again?

In collaboration with the EY Advanced Insights team, the EY Private Equity team analyzed the responses of over 300 senior private equity executives. The research is part of the 22nd edition of the EY Global Capital Confidence Barometer (pdf).

Respondents were clustered into two groups with distinct PE management strategies using latent class segmentation based on their expressed views on:

  • Firm-level preparation
  • Portfolio-level preparation
  • Anticipation of a recession
  • Reaction to the COVID-19 pandemic
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    Chapter 1

    Recession in 2020 impacts portfolios and tees up opportunities

    With a sharp market contraction and looming recession, PE firms consider their options as they plan for a post-pandemic world.

    In February 2020, the longest bull market since World War II was losing momentum and several macro indicators were suggesting an impending economic downturn. According to the results of the latest EY PE pulse survey, 40% of PE firms were modeling a recession to hit sometime in the year. Another 16% reported they were modeling a recession to hit sometime in 2021. However, by mid-March we were watching an erosion of confidence in real time. As the global scope of the pandemic crisis became known, the proportion of respondents anticipating a recession in 2020 jumped to almost all (95%).

    Two months later, all PE firms are responding to what’s evolved into one of the most dramatic and deepest downturns on record. As of April 2020, the International Monetary Fund (IMF) was forecasting the global economy to contract by 3.0% this year, in stark contrast to the 3.3% growth the IMF was predicting at the beginning of the year.1

    The only question now is around the length and the scope of the economic fallout from the pandemic. Initial optimism around the ability to contain the outbreak around the rapid development of successful medical interventions had many believing the global economy could rebound quickly. However, as the breadth and depth of the pandemic has become known, optimism for a so-called “V-shaped” recovery has given way to scenarios that anticipate deeper and more lasting macro dislocation, with protracted collapses in supply and greater deterioration in consumer and business confidence.

    Now, the most likely recovery scenario is that of a “seesaw,” with expanded ups-and-downs as various regions lock down periodically in response to flareups in the numbers of cases.

    M&A outlook cools, but opportunities exist amid the disruption

    With lending markets stalled and a limited ability to perform site visits, management team meetings and other in-person travel required for most deals, PE firms anticipate some measure of slowdown in the deal markets.

    While Q1 saw an increase in PE deal activity of 10% versus 2019, activity was concentrated in the first six weeks of the year. April saw just US$4.0b in new PE deals announced, a drop of more than 90% from the year prior. Now more than ever, “cash is king” holds true in the current market. PE firms with kegs of dry powder and loads of fire power are well-positioned to seize opportunities as they arise.

    With a four-to-six-year hold period, and a recession on the horizon, PE firms were fully prepared to carry assets though some kind of a downturn. Most firms had underwritten steep potential earnings before interest, taxes, depreciation and amortization (EBITDA) declines of 25-35% into their models. Few anticipated that entire industries could be shuttered overnight.

    For the last several weeks, PE firms have been focused on their portfolios — putting out fires, sourcing alternate supply chains, and most importantly, making sure portfolio companies had access to liquidity amid a slowdown in the lending markets.

    In the coming months, PE firms will increasingly turn their attention to deployment and identifying pockets of opportunity. Already, PE firms are actively investing in publicly traded assets — credit investments and minority equity positions in companies where transparency is high, valuations have dropped markedly, and where PE firms can play a role in providing capital to companies undergoing a measure of distress. As logjams in the deal markets resolve in the coming weeks, specifically around the ability to finance larger transactions and to conduct the required diligence, firms will concentrate on more traditional buyouts. Take-privates could be a compelling starting point, given some of the valuation disconnects between publicly traded companies, many of which have fallen dramatically in recent weeks, and private companies, which tend to fall more slowly.

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    Chapter 2

    PE firms are in a stronger position to respond to the pandemic

    Valuable lessons from the Great Recession leave PE firms with more robust capabilities to weather the next downturn.

    In the coming months, as the M&A market begins to move again and PE firms move toward increased deployment, the industry will be well prepared. PE firms learned valuable lessons from the Great Recession that have helped them feel more prepared for the current economic downturn at both the firm and industry levels.

    However, their confidence declined over the course of the PE pulse survey. Between 10 February and 26 February, 93% of PE respondents surveyed expressed confidence in their firm’s preparedness for a downturn versus 10 years ago. Between 12 March and 24 March, confidence among respondents surveyed dropped to 78%. At an industry level, confidence dropped from 76% in February to 70% in March. Nonetheless, it’s clear that confidence remains high, even as the scope of the crisis has become known. At a firm level, 87% of PE firms agree that they are better positioned for a recession, while 77% agree the PE industry as a whole is on firmer footing.

    Indeed, PE firms feel more capable of weathering the current storm than they were 10 years ago at both the firm and industry levels for the following reasons:

    • More capital

      PE firms have more capital at their disposal than ever before. PE funds are currently estimated to hold more than US$1.4t in immediately deployable funds. When other adjacent asset classes are added, capacity rises to more than US$2.6t.

      Source: Prequin

    • Increased diversification

      The rapid rise of private credit, which has become a US$800b industry, puts PE in a stronger position to provide long-term flexible capital across the entire capital structure. Firms have likewise expanded their global capabilities — once the province of a small handful of global managers, an increasing number of firms are seeking opportunities outside their home regions.

      Source: Prequin

    • Expanded operating capabilities and increased sector expertise

      While many firms had significant operating capabilities before the Great Recession, their ubiquity has increased markedly over the last several years. Currently, PE firms have 30% more operating partners than they had five years ago. Moreover, firms have added significantly to their sector capabilities.

      Source: Prequin

    • Access to better tools for limited partners

      PE limited partners have more tools available, such as an expanded market for secondary interests. This allows them to rebalance their portfolio to adjust to changing market conditions.

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    Chapter 3

    Differing focus areas, distinct points of view

    Fund- and portfolio-level respondents focus on different risks and recession-prepping actions.

    PE firms have taken several leaps since the Great Recession more than 10 years ago to prepare for the next downturn. Now that the downturn is here, there are some key strategic differences in the actions that PE professionals are taking with respect to their reactions to the pandemic based on whether they’re focused more on the fund or the portfolio.

    At the fund level

    In our research, respondents who tend to focus on fund-level issues represent 42% of those surveyed. Among their key concerns is a lack of fund diversification. In response, they’re working to diversify revenue streams and proactively communicating with limited partners (LPs) about the extent of disruption in the portfolio. They’re having conversations about new opportunities and any flexibility required in limited partnership agreements (LPAs). They may need to execute on those ambitions, including extensions or additional flex in investment mandates.

    At the portfolio level

    Respondents whose concerns weight more heavily on the portfolio, who represent 58% of those surveyed, see margin pressure, high levels of leverage and exposure to cyclical industries as primary areas of concern. To manage these risks, respondents say they are stress-testing their portfolios and working to make sure that companies have sufficient liquidity and working capital under a range of different pandemic scenarios. For some companies, corrective actions will be available, while others may require additional equity from the sponsor. Overall, 72% of respondents indicate that they were preparing for fresh capital injections. Fund-focused professionals are anticipating the need to renegotiate credit lines (60% versus 45% of portfolio managers); whereas portfolio managers are focused on reducing overall leverage (63% versus 44% of fund managers).

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    Chapter 4

    PE firms can play a vital role in a seesaw recovery

    PE firms will need to adapt to build resiliency now, while planning for opportunities next and beyond.

    Although governments are experimenting with ways to mitigate the stress on the health care system, experts’ consensus suggests that an effective vaccine is still 12 to 18 months away. As a result, PE firms will need to consider a path toward a post-pandemic normal for their funds and portfolio companies that is non-linear. A seesaw-shaped recovery will require a series of short-term adaptations that will differ by sector.

    PE firms have an important role to play in providing capital, knowledge and capabilities to companies that need it. In the short-term, they can help their portfolio companies prepare to manage the economic impacts of the pandemic and build resiliency.

    As they plan for what’s next and think about what lies beyond, PE firms have ample stores of dry powder to help stabilize markets and seize opportunities amid the disruption that position them to thrive in the economic resurgence that will come.

    • Methodology

      In collaboration with the EY Advanced Insights team, the EY Private Equity team analyzed the responses of over almost 300 senior private equity executives. The research is part of the 22nd edition of the EY Global Capital Confidence Barometer. Respondents were clustered into two groups with distinct PE management strategies using latent class segmentation based on their expressed views on firm-level preparation, portfolio-level preparation, anticipation of a recession and reaction to the COVID-19 pandemic. Reported differences are statistically significant using Pearson’s Chi-squared test with multiple comparison correction (FDR=0.05).

      The EY Advanced Insights team brings together EY services leaders, thought leaders and data scientists to develop a data-driven understanding of the challenges and opportunities driving the economic and dealmaking landscape. This team leverages advanced analytics and big data approaches to unlock deeper insights from data and create proprietary products and services to engage the market and EY clients.


    The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.