Goldman’s Private Equity Clients All Fear a Recession

December 6, 2019 | News, Private Equity
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Goldman Sachs private equity clients are hunkering down for a recession, but are still looking for multi-billion dollar investment opportunities.

Speaking on a Bloomberg interview, Alison Mass, Goldman Sachs Group Inc.’s chairman of investment banking, said: “Our clients are looking to put large amounts of capital to work.” She added that 30 billion dollar deals were doable. Deals could be even as high as $80 billion if a strategic partner came in alongside the private equity firm. But what about the risk of a recession?

“Every one of our clients is focused on being prepared for a recession,” Mass said.  She referred to one head of a PE firm who had circulated a 9-point “recession checklist” to each of his CEOs.

Big deals by private equity, and never mind recession fears

How does the fear of an economic downturn sit together with a burgeoning deal appetite? According to the Wall Street Journal earlier this week, cash pending deployment for buyouts in North America has reached a staggering $771.5 billion, up about 24% year to date.

The WSJ said the aggregate value of U.S. buyouts fell 25% year to date through October, compared with the year-ago period. It quoted data from Preqin. Deals totaled $155.2 billion during the first ten months of 2019—the lowest since 2014. The reasons for the slowing deal momentum were the trade tensions with China as well as fears of a recession.

A survey by SIFMA  this week showed that respondents expected slower growth but no recession in 2020. However, SIFMA does say that the probability of a recession in 2020 is 25%.

Goldman Sachs itself does not expect a recession but pegs the probability thereof at 20%.

All things considered

Private equity firms will probably continue their quest for lucrative deals that will put their cash to work. They will perhaps invest less in cyclical industries, or in foreign locations where the risk of a downturn is less than it is in the U.S.

Also, the WSJ observed that the fall in deal volume in recent months showed that buyout firms had become more disciplined in their approach.  During the last market peak in 2007, they had $366 billion worth of deals on their books in the US.

However, there is one silver lining. Recession or not, private equity firms are much better equipped to deal with an economic downturn now than they were when the global financial crisis struck a decade ago.

According to analysts at BCG, the private equity industry now has four advantages:

  • Liquidity and deal activity are more robust
  • Portfolios’mix is more recession-proof
  • Firms now place a greater emphasis on operating excellence (EBITDA growth) and value creation, thereby creating stronger companies
  • New investment formats such as long-hold funds of 15 years or more. These allow PE firms enough time for weathering business cycles

Says BCG: “By capitalizing on bold plays and doubling down on operational improvements, the private equity industry can make itself more recession-proof and future-ready.”

[Related Story:  Fundraising by Private Equity Funds Hits Record   ]

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