There’s Nothing ‘Dislocated’ About Private Equity In Today’s Discombobulated World

In October, private equity giant Blackstone
purchased Emerson Electric’s
air-conditioning business for $14 billion. Given soaring global interest rates, 40-year inflation highs, dicey geopolitics and a lingering pandemic, putting together this large a deal – one of several $10 billion-plus PE transactions this year – should have been near impossible.

That Blackstone succeeded is thanks to a host of new liquidity tools for private equity that are being stress-tested for the first time. Specifically, what clinched the Emerson purchase was a $2.6 billion loan provided by non-bank private credit providers including Blue Owl Capital, HPS Investment Partners, PSP Investments, Benefit Street Partners and Blackstone’s own credit arm.

These private credit providers, willing to make leveraged loans at a time when macro conditions mean banks can’t or won’t, either didn’t exist or were just getting off the ground during the 2009 Global Financial Crisis. Without a mature private credit market and other now common liquidity tools, global private equity acquisitions fell off a cliff in 2009, declining some 70 percent on an annual basis. Meanwhile, mergers and acquisitions value dropped a more modest 42 percent, according to Refinitiv.

Given this year’s toxic mix of trends and events, annual global M&A value is down a very comparable 34 percent, but private equity deal making is just 25 percent below last year’s record level. That’s especially noteworthy since capital not spent during the initial phase of the Covid-19 pandemic flooded the market in the seemingly more benign environment of 2021, leading to annual buyout value of $1.1 trillion – more than double the previous five-year annual average of $543 billion, according to Bain & Company. In fact, this year’s buyout numbers more than match healthy, pre-pandemic levels and 2022 is widely expected to be private equity’s second-best year ever for acquisition value and volume.

In addition to private credit providers – whose assets have increased four-and-a-half-fold to some $1.2 trillion since 2009 – the new tools and trends ensuring continued liquidity for buyouts (either directly or through knock-on effect) include secondary market leverage, notably in the form of loans, preferred equity and deferred payments, ideal for bridging pricing gaps between buyers and sellers and generating capital that can be redeployed into primary private equity investment; net asset value loans, a low-risk credit, collateralized against an entire fund’s portfolio (rather than against a single company); subscription line financing, another form of low-risk loan, this time collateralized against limited partners’ committed capital; seller financing (also used in the Emerson Electric deal); co-investment with PE funds and direct investment with fundless PE sponsors – both forms of investment focus on specific assets that can be easily stress-tested, keeping deals flowing in uncertain times; and stapled fund investment where a new PE fund commitment is combined with the secondary market purchase of a soon-to-be-realized asset from the same manager. The prospect of a quickly monetized investment means long-term fund commitment is more palatable for investors.

These rapidly developing liquidity options are making private equity more efficient, higher returning and safer, insulated more than ever from today’s dislocated traditional sources of debt, including bank-financed leveraged loans and high-yield bonds, until very recently essential ingredients for successful leveraged buyouts.

In a discombobulated world, private equity, with crucial assistance from newly viable liquidity sources, continues investing apace, unlike in previous periods of crisis. Indeed, private equity is finally able to take full advantage of the exceptional valuations that are usually the silver lining of volatility and crisis. This should result in equally exceptional returns for private equity investors and continued double-digit annual growth for the industry.

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