In the current geopolitical and economic climate, there are murmurings of an impending global recession. Whilst for most industries this will come as a harbinger of bad times ahead, for Private Equity (PE) firms this might not be the case. Chaos or dislocation can provide profits in disguise for private equity investors. This is because PE investors can find opportunities where others are pulling out of investments in this turbulent market environment. There are repeated occurrences of this historically, like during the Great Financial Crisis, the tech bubble, and the pandemic.
The former Apollo partner, Sachin Khajuria, believes that private equity will benefit from the next recession just as it has during the other economic downturns mentioned before. Recent analysis from Citco Waterfall found that the largest private equity firms are providing the highest returns for investors, with the average rate of carried interest paid to general partners increasing with size.
For example, one study of almost 500 PE-backed companies in the UK during the 2008 financial crisis found that these companies recovered faster from the crisis and captured more market share relative to their comparable non-PE competitors. This is because PE firms started lending to companies that were struggling, and we’ll most likely see this again.
Private Equity benefits from the people orientated nature of the industry meaning it is able to always respond to changing markets. PE investors are able to state their objective and aim for a profitable exit point.
For years, hedge funds have been turning to the private markets in search of alpha by launching hybrid funds and other vehicles. These vehicles have provided their investors with exposure to private equity (PE) and other private investments. Now that the public markets have taken a beating, having plunged more than 20% year to date, the search for alpha has become even more critical, not only for hedge funds but for all other investor types as well.