As demonstrated during the last downturn, distressed lending proved particularly useful as a countercyclical source of capital, and together with private credit’s significant dry powder, represents an important credit buffer during times of weakness in the traditional credit markets.
3. PE firms have expanded operating capabilities
As competition for deals continues to increase and valuations continue to climb, the imperative to reshape portfolio companies via continuously improving their operating capabilities (whether it is adding operating partners, improving technology or developing sector or functional expertise) has become more significant. Currently, PE firms have 30% more operating partners than they had just five years ago.
Many PE firms have significantly expanded the depth of their sector expertise. They’re using data and analytics to build tested playbooks to accelerate the value creation process. And many are using a shared services model to drive efficiencies across the portfolio in areas like procurement.
As such, firms are better situated than ever before to respond to the challenges of economic dislocation at their portfolio companies. Moreover, they’re well positioned to capitalize on the opportunities it might afford, such as investing in complex carve-outs, assets in need of optimization, or buy-and-build strategies to effect consolidation.
4. LPs are more sophisticated and have access to better tools
During the last crisis many LPs were constrained from investing additional capital in PE by the “denominator effect,” which happened when the valuations in their public portfolios fell dramatically, and many LPs found themselves suddenly overallocated to private investments relative to their target allocations.
Today, many LPs are closely monitoring their pacing in the event of a potential fall in public equities, and others are tweaking their investment process to allow for greater flexibility.
The market for LP secondaries — the buying and selling of limited partnership fund interests — has also seen significant growth over the past decade. Indeed, 2018 saw record levels of transactions. The result is more flexibility for investors to adjust to volatile market conditions.
What it means for PE’s current positioning
In aggregate, PE has evolved significantly over the last decade, and this evolution will continue. PE firms now have access to more capital to double-down on promising companies experiencing temporary distress from macro forces. Funds have improved operating capabilities to help companies make more informed decisions. And their wholesale expansion into adjacent asset classes – credit in particular – gives funds new means of providing support in ways they largely didn’t just a decade ago.