With a savage recession is in full swing, companies in private-equity portfolios are looking vulnerable
sound stewards of capital were revealed to be anything but during the 2007-09 financial crisis. Bank bosses were shown to have taken on too much risk. Star hedge-fund managers suffered losses. Nor have the years since then been kind. Banks have been tied up in regulatory knots and returns at hedge funds have been pedestrian at best.
The private-equity industry has been an exception to the trend. The funds it deployed during the crisis in 2007-09 have ended up yielding a median annualised return of 18%. And it has become far more important. Investors, from university endowments to public pension funds, have handed over ever more cash tofirms have evolved into financial conglomerates straddling buy-outs, property and credit markets, taking over some of the roles that Wall Street banks used to play.
deals has become “covenant-light”, meaning that companies can endure a big slump in profits without triggering penalties from their lenders. Since the 2007-09 crisis manymanagers have also set up huge credit arms—for the big four firms, these now account for a third of their assets. They may give managers more in-house expertise and mechanisms for raising debt, making it easier to restructure the debts of fragile portfolio companies on favourable terms.
The way funds are structured means that managers cannot deploy their “dry powder” raised for new funds into firms owned by older ones. But most older funds do have big reserves. Michael Chae, the chief financial officer of Blackstone, says that around $30bn of its $152bn of dry powder is set aside for them. “We have those reserves ready to support companies on the defensive and also to go on the offensive when opportunities arise.” Funds are also gathering capital in other ways.
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