Private equity is ready
Unsanitized: Private Equity Licks Its Chops
For years, private equity firms have been collecting and sitting on investor cash—“dry powder,” as it’s known in the industry. By last summer, the industry had $2.5 trillion in dry powder waiting to be deployed, a record level. PE firms buy distressed companies, mostly with debt (although they have enough equity to goose deals right now), loading that debt on the company and extracting value out for their own benefit. There are two things we know coming out of this crisis: companies will be more distressed and cheaper than ever to buy, and debt will be cheaper than ever to finance. Deal prices have been high but are finally falling, a perfect opportunity for the industry.
The firms know this too. I’ve obtained a March 15 slide deck from Bain & Co., a major management consultancy firm, that served as a kind of informational guide about COVID-19 for PE executives and CEOs in their corporate portfolios. On page 4, it gives the game away: “During and post this crisis, PE firms will be presented with unique opportunities to invest—important to be ready to act.”
Others have noticed the same impulse: a Goldman Sachs associate told Vox, “Corporate raiders and PE firms are sharpening their knives.” The bottom feeding may not happen right away, however. Private equity prefers buying with debt rather than equity, and the debt markets just aren’t complying at the moment, putting deals on ice. There have been almost no leveraged loan deals in the month of March. “While bargains will abound and publicly-traded companies can be picked up for a song, it’s not clear that credit markets on which PE now relies heavily will be in the mood to lend,” says Eileen Appelbaum, an expert on the industry.
