Private Equity: Coronavirus May Push Private Equity Dry Powder into Action

March 16, 2020 | News, Private Equity
https://dailyalts.com/wp-content/uploads/2020/03/52e9d6424b56aa14ea898579ce203e7c1d22dfe05b557241762979d1_640.png

The dramatic decline in equity markets due to the coronavirus could solve one of the private equity industry’s biggest problems.

Last year, the industry raised over $300 billion in commitments to private equity investments. As a result of his success, the industry entered the year with over $1 trillion in dry powder.

But all that money created a problem. With valuations surging, too much money chased too few ideas. Buyouts became extremely difficult due to valuation concerns. Dry powder accumulated.

Firms do not start earning fees until they deploy cash, so private equity dry powder wasn’t delivering returns.

Private Equity Dry Powder

Valuations have been cut dramatically by the market sell-off. They will likely spill over into private markets before we find a bottom.

The flood of retail closings and supply chain issues may tip the U.S. economy into a recession. This will lower valuations further and create attractive risk-reward setups for buyout investors.

There is a caveat to the development. There will be fewer Private Equity firms when this crisis is over.

To keep potential returns in the zone that attracted investors in the first place, some firms increased the amount of leverage they used when structuring deals. Many of those highly levered deals will fail. This will take the PE firms right down with them. Those that have substantial allocations and energy combined with too much debt will find it difficult to remain viable.

The remaining firms that resisted the urge to chase deal pricing higher could find themselves in a buyer-friendly climate with fewer competitors.

Related: Scaramucci: Trade War Holds Back Capital Expenditures

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Alt Insights

January 29, 2020

Venture Capital: The Kobe in “Bryant Stibel & Co”

Venture Capital: The Kobe in “Bryant Stibel & Co”
Shape

Latest Alternative Investment News

Alternative Investments: Activists Will Get Busy Soon, Says Tim Melvin

As companies become more undervalued as the economy slows because of shutdown orders across the United States, I expect that the pace of activist activity to increase. We should see…

https://dailyalts.com/wp-content/uploads/2020/04/54e5d0424b54b10ff3d8997cc3213f771737c3e456597441702a7cd297_640.jpg
Private Equity: Active Triage Happening at KKR and Other Funds
April 2, 2020     News, Private Equity

KKR & Co (NYSE: KKR) has shelved a plan to sell Singapore-based Goodpack, a Singapore based shipping containers, and logistics services.  They had bids for the company that was said…

https://dailyalts.com/wp-content/uploads/2020/04/key-visual-kyash.jpg
FinTech: Kyash Closes $45M Series C Funding
April 2, 2020     FinTech, News

Kyash, a Japanese fintech startup aspiring to be a leading challenger bank, gained $45 million in a Series C funding. The round was co-led by Greenspring Associates and Goodwater Capital,…

https://dailyalts.com/wp-content/uploads/2020/04/dollar-1362244_640-mmfs.jpg
Liquid Alternatives: Investors Shovelled $677B Into Money Market Funds In Scramble to Safety
April 2, 2020     Liquid Alternatives, News

Investors set up a record-breaking first quarter this year for inflows into U.S. money market funds. These funds gained from the massive risk-off sentiment that prevailed as investors realized the…

Scroll to Top