Private equity has always played a large role in our economy. The funds held by private equity firms and investors are responsible for much of the funding that helps grow and sustain successful businesses. Although private equity has always been important, it could be more critical than ever in the post-pandemic world. In this article, we will discuss various ways in which private equity can use the COVID-19 pandemic as an opportunity to help rebuild our economy.
What is Private Equity?
We have written about private equity before, so we will start with a brief overview of what private equity is and the role it plays in the economy.
Simply put, private equity is investments in shares of a company that are not publicly listed.
Private equity funds can be provided by private equity firms or individuals with high net worth. However, private equity investors differ from some other economic actors like venture capitalists or angel investors. They differ in that their goal is not to take on a large amount of risk and cash in on a significant economic reward.
Rather, they take on only moderate risk, and make extremely calculated and informed decisions. They do this by, for the most part, only investing in companies that they expect to succeed.
Alternatively, private equity firms also commonly take on businesses with some sort of specific issue that private equity may be able to help alleviate. Maybe the business’ leadership needs revamping, or they are under financial stress. In these cases, private equity firms or individuals not only provide cash, but they also provide guidance to businesses that may be struggling.
Investing in Private Equity Post COVID-19 to Help Struggling Businesses
Another important fact to know about private equity firms is that they acquire the entire company that they take on. Private equity firms don’t just bring monetary relief to businesses. They also come in with a significant amount of skill, training, and experience.
When your company is acquired by private equity, the stakeholders will typically come in with new ideas relating to your business and will implement changes. This prospect is generally quite appealing to companies. This is because receiving the financial assistance and leadership of a private equity firm is not an opportunity that comes around often.
How Can Private Equity Help the Post COVID-19 Economy?
Now that we have reviewed the private equity industry a bit, let’s look into our main question in this article. How can private equity use the COVID-19 crisis as an opportunity to help rebuild our economy?
Looking at Private Equity’s role in our last financial crisis
First, it is important to consider the role that private equity played in this country’s last financial crisis, and the lessons we have learned from that. Simply put, private equity as a whole did not respond incredibly well to the financial recession of 2007-2008.
Instead of diving in and using their capital to help revitalize a still-struggling economy, many private equity firms chose to wait on the sidelines a little too long and thus missed out on some rare opportunities.
These missed opportunities of the last recession have certainly taught private equity firms and individuals some important lessons. This time, private equity investors know that they need to act sooner, smarter, and bolder. Many leaders in the field are already mapping out their plans of action.
What is Dry Powder?
A critical concept to understand for this question, this article, and private equity in general, is that of dry powder.
Dry powder is committed but not yet allocated capital that a firm – such as a private equity firm – has on hand. Essentially, it is unspent cash just waiting to be invested. Dry powder is so important in answering the question of how private equity can lessen the economic impact of COVID-19. This is because private equity has accumulated more than a trillion dollars of dry powder – which, of course, is money just waiting for a purpose.
Their most important asset is, as previously mentioned, dry powder. This is so critical to economic recovery because dry powder is not an asset that many individuals or entities have. Aside from governments and large banks, hardly any other economic actors have the financial means to stimulate the economy through business growth, job creation, investments, and debt restructuring.
And even if other entities had the means to do this, very few would have the skills, knowledge, and experience to successfully do so. As a result, private equity has the opportunity to play such an important role in the post-COVID-19 economy.
So what exactly is the role that private equity can play in this COVID-19 recovery puzzle?
How Private Equity can help the economy
Now let’s talk specifics.
What are the skills that private equity professionals plan to utilize to help rebuild our struggling economy?
Have they already made plans to do so?
And if so, what do those plans encompass?
As mentioned in our initial discussion of private equity, these firms and individuals have the unique ability to work with struggling businesses. This is what they do – they carefully select a business that is having trouble and figure out how to help them succeed. They help manage their portfolio and have a proven track record of increasing business growth for years to come.
And they have a proven track record of generating huge returns. Yet, sometimes this can be a criticism of private equity’s oversized influence on the market. But in the state of our current economy, it could be incredibly beneficial.
Tragically, the pandemic has caused many businesses to consider closing their doors or selling. The silver lining of this is that some businesses that choose to sell may end up being acquired by private equity.
These acquisitions literally have the potential to save businesses and jobs.
Private equity firms can:
- provide funds
- preserve jobs
- restructure debt to businesses at risk of closing down.
And many private equity firms are already discussing just this.
With their $1.5 trillion of dry powder, private equity has the opportunity to save businesses that no one else can.
Some Disadvantages of Private Equity Investing Post COVID 19
This all sounds very positive in terms of what private equity can do, but there are of course some exceptions and drawbacks. Not all private equity firms were created equal. There is a wide variance in their operational capabilities.
To fully take on the actions we have been discussing above, private equity firms need to be performing many different functions at once. After all, private equity firms are going into this rebuilding period already having a portfolio of companies. Therefore, they can’t just drop those companies (who are likely also struggling due to COVID-19) and focus entirely on new acquisitions.
Many private equity firms are creating teams to focus on various tasks:
- assisting their current portfolio companies
- evaluating bailout packages
- developing debt recovery strategies
- sharing strategies and insights with investors
As you can imagine, not all private equity investors have the capacity to do all of this. Additionally, many firms may not even have the skillsets and experience necessary to adequately cover some of these important concerns.
The COVID-19 pandemic has created a whirlwind of tax documentation through all of the various recovery acts that have been passed. The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress can have enormous tax implications. In addition, many of the debt financing strategies that are in play must be delicately balanced.
Thus, dealing with the tax implications of these various acts on their portfolio companies can be a nightmare for private equity firms. And this is especially true if it is not done adequately. For this reason, in particular, not all private equity firms can dive into the post-COVID-19 recovery sphere with as much gusto as others.
We Can Help with Investment Management in 2021
The bottom line, though, is that private equity holds tremendous potential to stimulate economic recovery post-pandemic. But it’s still a world of investing where expert guidance is crucial.
Fortunately, there are financial experts with years of experience who can help investors navigate the marketplace.
However you choose to protect or invest your wealth, remember that professional guidance will provide you with the best options available to you. The right wealth management partner will make these options clear and easy to understand. This way, you can choose the investments that will serve you best.
Finding a financial advisor who takes the time to get to know you and treats your financial decisions with respect is the wisest move you can make. Schedule a meeting with us here to learn more. We look forward to discussing your goals with you.