Private equity: riding the COVID-19 crisis

Private equity often benefits from a crisis and change; in time there will be opportunities for PE firms to take public companies private at lower valuations, buy up underperforming corporate subsidiaries and profit from “special situations” (rescues and restructurings) as long as there are no severely underfunded pension schemes involved. Debt providers may be prepared to arrange interest payment holidays, relax principal repayments and suspend covenants. However, exits, essential for PE funds to show returns to their LP investors and to generate carried interest for the GPs, are likely to be delayed with much longer holding periods, a dearth of M&A activity and non-existent IPOs. Fund managers will need to be openly transparent with their LP investors with frequent communication on capital calls, delays in distributions and plans to mitigate the impact of COVID-19. Private equity has successfully weathered economic shocks before and the signs are that it is well prepared to do so again despite the immediate cutback in activity. Some of the best performing vintages were in periods of economic crisis.

(Data derived from Preqin reports)