There is at least one thing that has not changed the pandemic: Private equity companies are entering the Covid-19 crisis with cash, and they too will leave full pockets.
What’s happening: As the coronavirus shuts down businesses and sends the global economy up, there are fears that private equity – which surged after the 2008 financial crisis – could cause problems. To increase profits, these companies often strike deals that burden takeover targets with large amounts of debt. If the value of these firms falls on weaker sales, their owners of private equity could be in trouble.
According to Bain & Company, more than 75% of US private equity deals last year were “heavily leveraged,” meaning the company took on debt at least six times its operating income.
Several private equity-backed companies are in serious trouble and must seek government assistance. Yet thanks to unprecedented central bank assistance, debt financing remains cheap.
Private equity emerged from spring and summer with its reputation intact. Now, fundraising is on the rise again.
“Private equities are completely flooded with liquidity,” Viswas Raghavan, JPMorgan Chase’s head of Europe, Middle East and Africa, told me.
At the end of last year, dry powders – the industry speak for the money it still had to invest – hit a record $ 2.5 trillion, according to Bain. Manoj Mahenthiran, leader of US private equity at PwC, told me he thought the money remained at that level, or even higher.
Over the past decade, as interest rates have remained low, institutional investors such as pension funds have increasingly turned to private equity as a source of higher returns. With the central bank vowing to keep interest rates near future lows, that pipeline of support is only poised to expand.
The big question is where these companies intend to park all their money. High-growth assets such as technology and healthcare companies remain favorites of private equity. But many have become very expensive, making it harder to find good deals.
Some funds are eyeing assets in the hotel or retail sector, which are struggling this year. Scott Kleinman, vice president of Apollo Global Management, said at a conference last month that Apollo had invested about $ 5 billion in the aviation and aerospace sector over the previous six months. However, Mahenthiran said there was no evidence that private equity funds were pouring into this depressed segment of the economy.
Big picture: What’s clear is that the pandemic is not undermining the influence of growing private equity.
“The economy definitely tends toward private equity ownership,” said Mahenthiran. Millions of people are employed by PE-owned businesses.
Ludovic Phalippou, a professor of financial economics at the University of Oxford, said academics are still analyzing the consequences of more private capital in the system. Private companies do not face as stringent disclosure requirements as public companies, he said.
Private equity ownership also leads to an intense focus on extracting profits, according to Phalippou – a different model of the increasingly popular “stakeholder capitalism” that encourages executives to focus on employee welfare and social impact, as well as shareholder returns.
“This is a very different world that is taking shape,” he told me.
Agree or disagree? For Great Britain, the clock is ticking
Britain is running out of time to reach a trade deal with the European Union. Real.
Sights: When Britain left the bloc earlier this year, the two sides agreed on a transitional period that would last until 31 December. Nearly a year later, the British government is still locked in talks with its biggest trading partners – and they are down to the wires.
The EU leaders’ call on Thursday is seen as a new deadline for reaching a draft agreement. If the talks go on for any longer, there will start major logistical problems associated with his agreement.
However, big differences remain, raising prospects that Britain could end the year without a deal. That would take many businesses by surprise and could trigger major disruptions at the border.
“When one more week of negotiations comes and goes, it’s clear we’re not there yet, and the same set of core issues that have divided the talks for much of this year remain, for now, unresolved,” said ING economist James Smith. Friday clients.
Currently, investors think London is most likely to get a deal that includes trading in goods. However, there is a lot of uncertainty coming into the market, with the potential for a large move in the pound depending on the outcome.
Sterling could rise as high as $ 1.35 if a deal is reached, Nomura currency analyst Jordan Rochester told me. It has been trading near $ 1.31 in the last few days. Without a deal, he said, the currency could plunge to $ 1.20.
“The market wouldn’t be ready for a no-deal Brexit,” Rochester said. “I think you will get a significant withdrawal.”
Monday: Japanese GDP; Chinese retail sales and industrial production; JD.com, Casper Sleep Income, Tyson Foods, Baidu and SmileDirectClub
Tuesday: US retail sales and industrial production; Home Depot, Kohl and Walmart income
Wednesday: US building and housing permits commenced; Income Lowe, Target, TJX, L Brands, and Nvidia
Thursday: EU leaders are calling for; US initial jobless claims and existing home sales; Campbell Soup, Macy’s and Williams-Sonoma’s income
Friday: G20 finance ministers meeting; Earnings Foot Locker
– Hanna Ziady contributed reporting.