Private Equity: Northwestern Studies Industry’s Crisis Reaction

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Filippo Mezzanotti, an Assistant Professor of Finance at the Kellogg School of Management at Northwestern University, has been studying how private equity fares in a crisis.

He examined data from nearly 500 PE-backed companies in the United Kingdom before and after the Great Recession. He and his research team found that d that PE-backed companies weathered the crisis better than other companies.

Filippo Mezzanotti on PE Spending

Almost all firms cut back on spending during a crisis. Mr. Mezzanotti found the private equity-backed firms cut back far less. PE-owned firms spent 5.9 percent more than the non-PE ones. They concluded that this extra sending stems from the private-equity firms’ access to capital.

Private equity firms that have uncalled capital can use those funds to shore up companies in the current portfolio. That access to capital gives them a massive advantage over companies owned by entrepreneurs. They do not have the same access to capital as private equity firms, which puts them at a significant disadvantage.

Mezzanotti also found that PE firms often have the advantage of specialized knowledge. He points out that “Clearly if you have a private-equity firm with a lot of experience in turnaround and distress, that could be very useful now.”

Private equity firms have trillions of dollars of dry powder right. Mezzanotti thinks this will allow them to play a critical role during the current crisis. They will have the capital to shore up portfolio companies and direct desperately needed money to companies in which they choose to invest. We have already seen this happen as there has been $17 billion in private investment in public equity in 2020.

Wayfair(W) and Dave and Busters (PLAY) are two examples of private equity firms making significant non-control investments in struggling companies.

Mezzanotti points out that this is not a new role for private equity firms. One research study from earlier this year showed that PE firms acquired one-quarter of all failed banks between 2009 and 2014. The PE-backed banks went on to recover better than banks that had been acquired by other banks.

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