Private equity as an asset class has grown substantially since the global financial crisis, and firms have much broader strategies and tools available to them.
Just over a decade on from the downturn, the industry faces another significant challenge. In the second of a two-part series, S&P Global Market Intelligence looks at how strategy diversification and the evolution of the debt market will affect how the private equity industry is impacted by the coronavirus outbreak.
Broadening out private equity's dry powder to include adjacent strategies such as credit, infrastructure, real estate and growth capital, the aggregate amount of dry powder private equity firms have available to deploy jumps to over $2.6 trillion, according to an Ernst & Young LLP report.
The large firms — The Blackstone Group Inc., Carlyle Group Inc. and KKR & Co. Inc., for example — have continued to grow over the past decade. Likewise, an increasing number of mid-market managers have looked to add strategies to their offerings compared with a single focus during the global financial crisis, or GFC. Not only does this give them more scope to invest across different opportunities as and when they arise, but it has also given them more flexibility in the way they hold assets.
In the U.K. and Europe, the industry has shifted significantly, not just in terms of capital and assets under management, but also across a larger number of firms with different regional experience, sector focus and size levels for target companies, Vinay Ghai, a managing director in Robert W. Baird & Co. Inc.'s financial sponsor group, said.
Debt markets are more diversified
Over the past five years or so, many credit facilities have been covenant-lite compared to pre-2008 when financial and nonfinancial covenants in loan agreements were much tougher. This is a pressing concern at the minute, Dechert Private Investment Funds and Transactions Partner Thiha Tun said. "When a portfolio company gets into trouble, when the initial red flag goes up under the old credit agreements, you probably have another 10 steps to fall down before you became completely worthless. But today, the red flag goes up maybe even the third or whatever step from the bottom and you have very little time and little optionality as to how you can save that company," he said.
Government responses to the coronavirus crisis are very different compared with the GFC. "During the GFC, there were certain bailout mechanisms that were put in place by governments, but today, you see far or more," Tun added.
More broadly, as the banks roiled in the aftermath under the critical eye of regulators — retreating particularly from lending in the mid-market — private debt players swarmed in to fill the gap. Private credit assets under management reached a record $812 billion as of June 2019, and there are a record 1,764 fund managers operating in the space, over twice as many as five years ago, according to Preqin Ltd.'s 2020 global private debt report. These players' fruition in less turbulent times opens up unchartered territory as markets fall into the coronavirus crisis.
Both banks and private credit managers now have to weather this storm, albeit in very different circumstances from the financial markets driven crisis. "You've got a situation where the governments are coming in and supporting financing and also salary costs at a completely different level to what was happening before. … Everything is different," Baird's Ghai said.