Truths and misconceptions surrounding private equity, dry powder and recovery
By Michael Gull, Executive Director, Business Development, MUFG Investor Services – As the Coronavirus pandemic continues to cut through our lives, the urgency of robust public assistance for businesses remains a matter of vital economic importance. And yet, since the earliest days of the crisis, certain critics have taken exception to the role of private equity in the recovery.
Much outrage has been directed at a perceived conflict between private investment firms who hold large quantities of dry powder (unused capital) and petitions to include their portfolio companies in public business stimulus packages such as the Paycheck Protection Program. Some critics might wonder why loans are given to those who don’t put their dry powder towards portfolio company support. But this stance not only over-simplifies and mischaracterises the role of dry powder, it is emblematic of much wider misconceptions about the significant contributions private equity makes both to portfolio companies and the economy as a whole.
As governments around the globe consider additional stimulus spending in the face of COVID-19, it’s especially relevant to reconsider these misconceptions about the industry, recognise the value private equity provides during a downturn, and offer support instead of resistance. Regardless of what the critics think they know about private equity, the simple fact is that the industry supports 843,000 jobs and 4,300 businesses in the UK alone – and the US paints a similar picture. Negative attitudes about dry powder should not be permitted to overshadow such numbers.
Moreover, the hang-up on dry powder as an impediment to relief, especially in the US, ignores the fact that dry powder has many applications beyond simple operational investment. Even firms who appear reluctant to spend theirs may in reality be holding off on immediate action to ensure capital is deployed according to a long-term vision that ultimately embraces the health and well-being of portfolio companies and fund performance. Such firms aren’t waiting on the sidelines. They are acting with appropriate prudence and responsibility.
While dry powder does have a multitude of uses, it’s worth noting that certain limited partnership agreements do restrict its deployment, thus making the current crisis truly difficult for these arrangements. Once again, the existence of capital should not be a disqualifier for support.
While dry powder garners most of the press on both sides of the Atlantic, objections to private equity seeking stimulus support are in fact much more general in origin. Most critics simply do not realise or comprehend the role private equity plays in supporting businesses of all sizes. From Main Street to Wall Street, not only does private equity drive growth in good times, it is one of our best institutional buffers in times of crisis.
During the pandemic, private equity fund managers have worked to help guide portfolio companies through calamity. The industry has a strong track record in building successful companies, putting in place appropriate financial structures which both incentivise management teams and consistently produce strong returns for institutional investors. As COVID-19 continues to wreak havoc on companies and economies around the globe, the private equity community remain ambitious to play a leading role in the recovery.
During the last global financial downturn in 2008, private equity backed companies outperformed others, and many did not need financial support precisely due to the assistance private equity provides. This is not insignificant, as these companies account for 5 per cent of total GDP in the US and 1.5 per cent of GDP in the UK. The industry plays an extremely vital economic role in both countries and is worthy of its support where necessary.
On balance, it’s important that PE firms in turn support staff through appropriate Covid-19 responses. Action should be taken to provide financing to companies struggling to raise debt in public markets and to be more open and transparent regarding these activities. Better communication, both to stakeholders and to the public, will make a tremendous difference in perceived shortcomings. Increased regulation is also always possible and is often likely after a crisis, which in turn will change client behaviour and come with an expectation of greater transparency and data granularity.
While critics can play an important role in voicing concerns, too often misunderstandings stand in the way of progress. The time is right for critics on all sides of the issue to take a closer look, find common ground, and foster a friendly and productive environment for the millions employed by private equity-backed companies.