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Private Equity’s best returns tend to follow recessionary periods. With Covid-19 turning the global economy into recession and causing turmoil in public financial markets, investors are reviewing their investment strategies and taking higher exposure to Private Equity as an asset class: “the best time is to invest is NOW!”
So what enables PE / VC Funds to outperform in a crisis?
Funds can invest in companies at lower valuations, leaving more room to expand multiples after recovery
― being able to acquire the same businesses at lower valuations further increases the potential and thus drives returns. ― with both Revenues and EBITDA (as applicable) would also be depressed by the business downturn; undervaluation of companies and provides opportunities for Funds. ― leverage these lower, sometimes distressed valuations; making more and smaller investments to take advantage of these opportunities.
Funds have better access to capital and deploy it more flexibly, allowing portfolio companies to seize growth opportunities in a crisis, while competitors may be mired in austerity measures.
― flexible access to capital in a downturn can be essential to prevent bankruptcies
― the risk of ‘catastrophic loss’ is less than half for PE-backed companies compared to public companies, during crises like Covid-19
― Fund backed companies recovered faster from the crisis and captured more market share
― Fund backed companies are better prepared for an economic shock
Funds’ active management approach and operational support gives PE-backed businesses a competitive advantage as they respond to a crisis more quickly; effectively “future-proofing companies”
― close contact between company management and the fund manager and advisors – monthly reviews, quarterly board meetings, etc.; in times of crisis, this frequency increases even more. ― outside expertise: most top tier funds retain senior advisors who join the boards of various portfolio companies. Typically, these advisors are experienced former CEOs with expansive industry and leadership experience. Senior advisors support the CEOs and make their time, knowledge, and network available to the portfolio company. ― operational support: Funds establish operational teams to support their portfolio companies, helping businesses develop new capabilities and manage transformation programs. Hard to access expertise, in areas such as finance compliance, marketing, and new market entry, are where funds’ operational teams provide particular-value. In addition, cross-portfolio synergies could offer portfolio companies significant cost advantages and strengths in their supply chain.
We are witnessing increased traction from our LPs - a clear validation of how private equity as an asset class is clearly far more tenacious as compared to traditional investment classes, both in terms of risk protection and potential returns.
(Note: Reference - Moonfare’s whitepaper on this topic: “Now is the time to invest in PE”)
- Abhishek, Managing Partner, Cornerstone Venture Partners Fund (CSVP Fund)