Why private equity can endure the next economic downturn

Private equity (PE) is an increasingly important contributor to the global economy. The PE industry has doubled in size since the 2008 recession, with US$3.4t in assets currently under management (AUM), a figure that is expected to increase to $5t over the next 3-5 years. With over $700B in “dry powder” available in PE funds across the world, an economic downturn will likely present compelling opportunities to deploy capital reserves when prices are more attractive to investors.

While PE-backed companies performed generally well during the GFC, over the last decade, the PE model has evolved in a number of ways that make it even better prepared for future downturns. Funds have improved operating capabilities to help companies make smart decisions in the face of increased volatility. And their wholesale expansion into adjacent asset classes – credit in particular – gives funds new means of providing support in ways they largely couldn’t just a decade ago.

Perhaps most importantly, as consensus grows regarding the lateness of the current macro cycle, PE firms are already planning for a potential market correction and the opportunities it might afford.

Learning outcomes

In a number of important ways, PE firms are better prepared for a downturn than they were a decade ago:

• The industry has more capital at its disposal.
• PE has diversified in ways that increase its resilience.
• PE firms have expanded their operating capabilities.
• LPs are more sophisticated and have access to better portfolio management tools.
• Perhaps most significantly, PE firms are prepared to deploy more aggressively than during the 2008 recession

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