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Yes, a recession offers significant opportunities for private equity


Anyone who has the idea that private equity is also heavily impacted by the current corona crisis will be disappointed. The strength of private equity is that it is less sensitive to short-term movements on the stock market, because it has a much longer investment horizon with regards to the companies in its portfolio. Moreover, this horizon is flexible. It can be adapted to market developments.

A deep recession suddenly offers significant opportunities for private equity. Our economy is much healthier than it was ten years ago, which means that once it has bottomed, the economy can recover quickly. Companies in trouble and rescued by private equity can benefit from this recovery. There is probably relatively little time between the deep trough and the sharp recovery, which benefits returns. The foundations for private equity have further improved in the past decade. Private equity has matured and learned a lot from the previous crisis. Each private equity fund already took into account the recession scenario. The private equity funds were therefore already wary. In the past, private equity yielded the best returns in the years immediately following a crisis. That will be no different this time. The cautious attitude of recent years is now being rewarded in full. The valuation of listed companies has fallen rapidly in the current bear market. It is a matter of waiting until there are companies that may or may not have to sell parts. That reduces the price. At the same time, the current crisis means that interest rates will remain low for even longer. Central bankers will do everything they can to safeguard financial stability, which means that private equity will also continue to have access to debt at low interest rates.

Dry powder can start working

The advantage of private equity is that it is able to implement strategic changes quickly, unlike listed companies, where extensive communication with the various stakeholders is required. The lessons from the Great Financial Crisis make private equity portfolios more diversified and less cyclical in nature. The large amount of dry powder - private equity capital that has been on the sidelines so far - is no longer a problem. That money can now be put to work. This allows private equity companies to increase their investments in bad times, where listed companies have difficulties to finance themselves. In the past, private equity backed companies therefore gained market share at the expense of listed companies. Private equity will also be less affected by competition from other financial institutions in the coming years. Banks and insurers are now facing the third systemic crisis in ten years. First the credit crisis, then the euro crisis and now the corona crisis. That means more rules and maybe even nationalizations. They now mainly focus on the risks and not on the opportunities.

Due to the relatively good performance of private equity in times of crisis, there has been more appreciation for private equity among investors in recent years. Private equity therefore has access to institutional capital. Market parties know better about private equity than before, which means they can take advantage of forced sales by hedge funds and banks.


Advantage through disruption

A crisis often accelerates innovation. Suddenly everyone is working at home, learning at home and shopping at home; many of these disruptive innovations have been made possible by new technology. And that is usually not with listed companies. Companies on the stock market are now threatened by relative newcomers. Many of these young companies are owned by private equity. Adapting to a new reality creates new business models. This offers opportunities for private equity investors.


The advantage of committed capital

The results on the fair are unprecedented. Days with ten percent off and ten percent off have become normal. This creates a lot of unrest among investors, with the danger that they make the wrong decisions. Many investors in listed shares take their losses and steps out. They may return, but the prices will probably be a lot higher.

This behavior ensures that the actual return on shares is lower than what the stock market averages indicate in the long term. On balance, the realized return for equity investors is therefore soon two percent per year lower than if they did not get in and out. This does not apply to private equity. The advantage of assets that have been committed for a longer period of time is that the manager can make use of the decreased valuations and the increased opportunities in the market. As a result, the return on private equity is long-term.

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