In 2018, the Private equity (PE) industry marked the first year to raise more capital through the private markets. Many new investors in fluxed into private equity investment because PE generated a strong history of returns when growth chances were feeble.
The private equity industry acts as a portfolio diversifier with its significant data showing its outperformance during distressed periods or an eventual downturn of a company. Private equity has delivered a smooth result as against public equities down the history line. J.P. Morgan’s analysis found that two-fifth of publicly listed equities experienced a catastrophic loss, whereas less than 3 out of 100 PE funds suffered a similar loss.
Truly speaking, a downswing is an opportunity for the PE industry to deploy capital, make bold and calculated moves. Private equity professionals’ job is interesting and challenging. Let us see how.
Dependency on Private Equity Industry: Business Benefits
A bear market features are a falling price and are generally masked in pessimism. The private equity firm’s capability to plan and invest over the long-term vouches several advantages. A few of them are as follows.
Private equity professionals are well-equipped with identifying difficulties beforehand. They can alleviate a company’s finance concerns, help them renegotiate loans and debt obligations. In a bear market, they tend to take a buy-and-build approach and add numbers to their acquisitions. Whereas, the public companies avoid retrenches paving the advantage to the private equity industry.
The PE managers are generally specialists in particular sectors by passing through multiple economic cycles. The PE firms provide strategic guidance and assist companies to overcome their operating problems. A Harvard study concludes that PE-backed companies are resilient to downswings and act as an economic stabilizer during the recession period.
During a downturn period, any company owner would turn panic and may opt for panic selling, which leads to liquidation of funds. At this juncture, PE illiquid funds turn to be an advantage for panic sellers. Meanwhile, PE professionals get the benefit of the multi-year holding period. They wait for a favorable market period to exit their underlying portfolio companies.
The fund structures, long-term investment policy, and active involvement of PE firms facilitate them to prevent fire sales. Henceforth, it is beneficial for the investors to embrace PE for outperforming potential and a smoother ride during a crisis.
PE firms have a vested interest to acquire success and share best practices. They provide management incentives with all their experience. They are experts in creating value. Moreover, they have valuable business connections and these qualities serve as an opportunity to grow amidst the downturn period.
Boston Consulting Group’s study reveals that two-thirds of PE deals result in (20 percent at the least) annual growth for the company they purchased. Fifty percent of the companies witness annual profits.
The take away note
If PE acquires your firm or interested in investing, you can rely on them for success. While screening the PE firms to bank on, you can always look forward to tips and hear emerging trends from Merger and Acquisition advisors.