With a decade of unprecedented growth, private equity (PE) firms now globally manage more than US$3.8t in assets, more than double the amount they managed during the global financial crisis (GFC). In the face of increased economic volatility and a potential period of limited growth, a new EY report, "Why private equity can endure the next downturn" unpacks some of the current and future dynamics as they relate to the private equity industry’s preparedness.
Andres Saenz, EY Global Private Equity Leader, says:
“The last decade has seen widespread experimentation and innovation within the PE industry where a wide range of new private capital vehicles and investment models were introduced, which has expanded the gamut of investable companies at almost all stages of their life cycles. The result is that PE has attracted an abundance of capital and developed new strategies for deployment that will continue to evolve into the future.”
However, according to the report, there are mounting concerns over the potential for an economic downturn driven by geopolitical instability, changing societal expectations, pockets of market excess and sector disruption, and uncertainty related to the impacts of COVID-19. The report analyzes the preparedness of PE to face a possible downturn, with the following key themes explored in detail:
The industry has more capital at its disposal
As long-time investors in PE increase their exposure to the asset class and a wide range of new entrants – including family offices, sovereign wealth funds and high net worth investors – invest in PE for the first time, PE firms have more capital at their disposal than even before. PE funds are currently estimated to hold more than US$1.4t in immediately deployable funds, and when other adjacent asset classes are added – credit, infrastructure, real estate, growth capital etc. – the aggregate amount of committed capital PE can readily deploy stands at more than US$2.6t.
The industry has diversified in ways that increase its resilience
As banks shifted away from lending to small and medium-size enterprises in the wake of the global financial crisis in 2008, PE firms and other private capital providers stepped in to fill the void. The rapid rise of private credit, which has become a US$800b industry, enables PE to be in an even stronger position to provide long-term flexible capital across the entire capital structure.
PE firms have expanded operating capabilities
While many firms had significant operating capabilities in place well before the global financial crisis, their ubiquity has increased markedly over the last several years.
Peter Witte, EY Global Private Equity Lead Analyst, says:
“Currently, PE firms have 30% more operating partners than they had just five years ago. As a result, firms are well prepared to help their portfolio companies manage operational disruption and economic dislocation.”
Stability in challenging times
Andrew Wollaston, EY Global Reshaping Results, Restructuring and Strategy and Transactions Private Equity Leader, says:
“Today, PE’s ability to invest for longer periods of time, coupled with its tremendous levels of dry powder and operational knowledge in the industry provide the wherewithal to help provide stability and continuity in challenging times. The big questions are around the courage, patience and summoning the conviction to act when others are fearful.”
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