According to a recent report by EY, four ways in which PE firms today are better prepared for an economic downturn are as follows:
The industry has more capital at its disposal
- LPs have increased their exposure to the asset class in PE. This includes new entrants as family offices, sovereign wealth funds and HNWI investing for their first time in PE.
- Growth of direct investments, co – investments and separate accounts in recent years.
The industry has diversified in ways that increase its resilience
- The last decade has seen PE firms increasingly diversify across a wide array of private capital strategies, including growth capital, real estate, infrastructure, sector-specific funds, and private credit, in particular.
- Private credit, in the forms of direct lending, distressed, special situations and other strategies, has grown to become a US$800b industry and is expected to double to more than US$1.4t by 2023, according to Preqin estimates.
PE firms have expanded operating capabilities
- Many PE firms have significantly expanded the depth of their sector expertise. For instance, using data and analytics to build tested playbooks to accelerate the value creation process.
- As such, firms are better situated than ever before to respond to the challenges of economic dislocation at their portfolio companies.
LPs are more sophisticated and have access to better tools
- Today, many LPs are closely monitoring their pacing in the event of a potential fall in public equities, and others are tweaking their investment process to allow for greater flexibility.
- The market for LP secondaries – the buying and selling of limited partnership fund interests – has also seen significant growth over the past decade. In fact, 2018 saw record levels of such transactions. The result is more flexibility for investors to adjust to volatile market conditions.
In summary, PE has evolved significantly over the last decade, and this evolution will continue. PE firms now have access to more capital to double-down on promising companies experiencing temporary distress from macro forces. Funds have improved operating capabilities to help companies make more informed decisions. And, their wholesale expansion into adjacent asset classes – credit in particular – gives funds new means of providing support in ways they largely did not have a decade ago.