Jan 31, 2022 - Economy

Private equity's no-lose scenario

Illustration: Shoshana Gordon/Axios

As the financial crisis was unfolding in September 2008, a top buyout executive was nonplussed. He said that his firm could invest at a discount if stocks went down, and had long enough time horizons that it wouldn't be forced into fire sales of existing portfolio companies. And banks would work to avoid debt defaults.

Why it matters: It was arrogant. It was self-serving. It was largely correct.

Fast forward to 2021: Private equity isn't worrying about stock market losses or the coming Fed rate hikes. All systems are go, and arguably in overdrive.

  • Again, buying opportunities abound. Just look at today's BFD for Citrix, which is coming at a share price lower than where the software maker was trading for most of the past two years.
  • Leveraged loan inflows are on the rise, since such notes come at floating rates. Or, put another way, there are blizzard conditions on dry powder mountain.
  • Private equity has raised record amounts of fund capital over the past several years, so it needn't slow down because the "search for yield" will result in LP pullback. For example, Warburg Pincus is raising $16 billion for its latest flagship.

A key difference between September 2008 and January 2022, of course, is that today's macro economy is extremely strong (e.g., GDP, unemployment, etc.).

  • Sure there are painful pressure points — inflation, hiring troubles, the next variant, possible WWIII with Russia — but few economists would prefer then to now.

The bottom line: Private equity plays a "heads we win, tales we win" game. And that's as true now as it's ever been.

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