Private Equity and Crises

It’s important to look at how private equity, as an asset class, has been affected by economic crisis. In the last twenty years we have had three relevant economic crises. The first one was the internet bust of two thousand, the second the financial crisis of two thousand nine and the third, the pandemic of two thousand twenty. Let’s look at how these affected the private equity market. Of course, at the current time, April 2020, the pandemic crisis is still playing out so we do not have the benefit of hindsight.

The internet crisis of 2000 was more of a blip for private equity. The market fell for a year or so, but then recovered strongly and grew very fast until 2009. A big feature of the market at the time was the abundance of inexperienced fund managers; one study estimated that as many as 25% of funds raised in that period were first time funds. The financial crisis of 2009 was much more serious. The private equity market fell by 50% and subsequently reset from this lower level. Fund managers, many with a financial background, were poorly equipped to weather the new required focus of managing the portfolio and this factor, coupled with a credit crunch, led to a significant slowdown and several managers exiting the market.

The industry faces the 2020 pandemic in a much stronger position than it did in 2009. Many managers who lived through 2009 are much more ready to take care of their portfolio companies and the financial system is much stronger than it was in 2009. It’s a big benefit that the last crisis was just ten years ago. Many of the people who worked through it are still in the market and mostly in more senior positions than before. This is a valuable cohort for the industry.

Similarly to 2009, there will be a flight to quality, which will favour the more established fund managers for a period; and there will be a slowdown. But ultimately the private equity asset class, unlike other asset classes, benefits from a long term capital base and managers with deep experience and strong skills; and this will make all the difference.

So can there be opportunities for private equity as a result of the 2020 pandemic? Yes, and in a much bigger way than in 2009. Let’s think about the differences. In 2009 there was a financial crisis, which had an impact across all sectors of the economy, which eventually recovered. In 2020, we have a crisis that has caused complete disruption in consumer behaviour, a short term one we all know, and a long term one which we still cannot be sure about. A global disruption in consumer behaviour, means a disruption that will be differentiated across sectors, which is a scenario completely different from 2009. In this sense, this will be a revolution, a new order is coming. Disruption means opportunity. We now need entrepreneurs who can spot the new opportunities that will emerge, and we need private equity fund managers who can talent scout these entrepreneurs and support them. Fund managers who will successfully play offense in the new environment will become the new top quartile; the others, the ones frozen with indecision, waiting, will fall by the wayside.

So what the private equity industry is facing now is an unparalleled opportunity and needs to get ready for the dust to settle and for the new order to emerge.