Fund managers will likely deploy more than $2 trillion in private equity dry powder that has sat on the sidelines during the recent carnage and volatility in the financial market.

Over $700 billion of that is in buyout strategies. If leverage becomes available again in the near future, they could turn that into $1.5 trillion to buy distressed assets and companies.

Private Equity Dry Powder

Private equity firms will feel the pain in their existing assets should we experience a sharp, short recession.

Steven Kaplan, the co-founder of the entrepreneurship program at the University of Chicago Booth School of Business, told Bloomberg: “To the extent that this is a bad recession, they will take big hits on their existing investments, particularly those that they made in the last two years at very high multiples. They are going to have to take down equity to pay off their capital call credit lines. The equity they call will immediately be underwater.”

The long-term opportunity should offset the short-term pain.

When we go back and look at private equity firms by vintage funds that have the capital to deploy in a recession when pricing is weak, do much better, on average, than those that deploy capital in good times when they have to pay much higher cash flow multiples to acquire targets.

PE Shops Moving On the Market

Apollo Global (NYSE: APO) is already preparing to move as markets have fallen.

On a call with investors in Apollo’s private equity funds, Matt Nord and David Sambur, Apollos Heads of Private Equity said that the firm has already deployed $100 million on distressed assets. In addition, they are looking at as many as 250 additional opportunities.

Apollo has also reportedly called capital from investors to buy up the heavily discounted debt of many of their portfolio companies. Reports are that they have called in $500 million of their current $2 billion of dry powder in recent weeks for debt purchases.

KKR (NYSE: KKR) has started buying as well during the coronavirus crisis. Last week we reported that the private equity firm was purchasing UK recycling company Viridor from Pennon Group for £4.2 billion in cash. KKR is also said to be raising to raise at least $750 million for a fund that will invest in startups in Asia’s technology, media, and telecommunications sector and as much as $15 billion for an Asian buyout fund.

Private equity will be very busy as this unfolds shoring up existing companies and looking to add new ones at a bargain and distressed pricing levels.

By: Tim Melvin

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