Private Equity Seen As Smart Risk In Uncertain Times

Traditionally, investing in the stock market was seen as a logical choice for most investors, regardless of wealth. Private equity, on the other hand, is commonly seen as riskier with the potential of realizing high rewards and high losses. That perception could be changing in 2020.

FOX Business has reported that ultra-wealthy individuals increased their investments in private equity to 26 percent in the first quarter of 2020, from 24 percent at the end of 2019, according to data from Tiger 21. Tiger 21 is an exclusive membership network for high-net-worth investors. That was the highest level of PE investment the firm has ever recorded among its clients.

Other takeaways from the data include:

– Fixed income holdings among Tiger 21 investors dropped to 8 percent, the lowest in 10 years

– Real estate holdings remain at the top of investors’ lists, with 28 percent allocation in Q1

– Most other investments remained similar to past years, including public equity (21 percent), cash (12 percent), and hedge funds (3 percent)

COVID-19 and Middle Market Private Equity

For many middle-market sponsors, the focus over the last few months has been on managing the crisis and preserving value at existing portfolio companies, reports Houlihan Lokey. The bank believes funds continue to hold “record amounts of dry powder.” Deloitte puts that number at $1.5 trillion.

This is interesting to note, because some experts believe that if COVID-19 pushes us into a recession, investment companies will put money to work a lot faster than they did during the last downturn in 2008. Why? Because following the last global economic crisis, PE-backed companies ultimately suffered fewer defaults and invested more in their businesses than companies not backed by private equity.

Given the abundance of dry powder, along with the favorable returns PE investors who were willing to invest during the last downturn achieved, it makes sense that we’re seeing an uptick in  outreach from PE funds looking to deploy capital. Following an acquisition, companies are more likely to do well than those without PE support. PE portfolio companies often have stronger relationships with banks and lenders than the average corporation. PE firms also tend to be hyper-focused on survival – guiding portfolio companies to take market share from struggling competitors, restructuring debt, or fighting for help with supply chain issues.

We expect middle market private equity to play a critical role in our nation’s recovery from this crisis. That being said, good companies will always attract investors. If you are considering buying or selling a business, contact us for a confidential discussion of possibilities appropriate to your specific situation.