The Recession-Proof Investment: How Private Equity Delivers in Tough Economic Times
With fears of a recession looming and interest rates continuing to rise against stubborn inflation, many investors are keen to understand how an economic downturn will affect private equity. Historical data across three significant downturns, however, suggests that PE remains resilient during recessionary periods, outperforming public markets.
Utilising data provided by Preqin (2020)¹, Vantage conducted an analysis of the investment returns delivered by Private Equity Funds during the recessionary periods following the “dot-com crash” in 2000 and GFC of 2008 to 2010. Australian and New Zealand Private Equity funds, focused on investing in the lower to mid-market segment, investing during and up to 2 years following these events generated median and upper quartile net returns of 19.6% p.a. and 45.0% p.a. respectively, significantly outperforming the public market comparables during these periods (see figure 1).
A number of academic papers have reported on Private Equity’s resilience versus non-Private Equity backed peers during past economic downturns. Research conducted by Wilson et al. (2012)², from a data set of 14 million financial records, found that Private Equity backed businesses in the United Kingdom during the period 1995 – 2010, experienced significantly positive growth, relative to peers that were non-PE backed throughout the 2008 crisis. A study by Cliffwater (2018)³ examining Private Equity performance among US State Pensions echoed Wilson’s findings, revealing that Private Equity outperformed Public Equities by 4.0% per year over the 16-year measuring period. Interestingly, this difference was even more pronounced during bear markets including the GFC with Private Equity outperforming Public Equity by 6.6% (see figure 2).
The more recent economic instability that Covid-19 brought has also been analysed with respect to the performance of Private Equity and, once again, studies reveal similar findings. PE-backed firms significantly outperformed non-PE-backed firms and had much lower incidences of liquidation (6% & 30% respectively) during the 2020 to 2021 pandemic period. The researchers noted that in cases of distress, PE-backed firms were more likely to restructure through formal negotiations with creditors rather than defaulting to liquidation, attesting to the skill and expertise of PE investors in unpredictable times⁴.
The reason for Private Equity’s outperformance is due to several factors which include:
Private equity managers have a unique opportunity to acquire new businesses and generate higher returns during economic downturns. As the economy slows down, company valuations decline, which presents an advantage for private equity funds to acquire businesses at lower valuations. With reduced competition from other buyers such as publicly listed companies and strategic purchasers, private equity funds can take advantage of lower purchase multiples to acquire businesses at attractive valuations. This can potentially lead to higher returns on investment when the economy recovers. According to research by McKinsey, private equity firms that were more acquisitive during the 2008 Global Financial Crisis achieved significantly higher average rates of return across funds and raised more capital than those that were less acquisitive.⁵ This suggests that being well-positioned to take advantage of economic downturns can lead to more stable returns across periods of high volatilities.
Long-term View of Investing
Macroeconomic events, such as recessions or market volatility, can certainly impact private equity investments in the short-term. However, private equity firms generally take a long-term view when investing, and their strategies are designed to weather economic ups and downs. For example, during a recession, private equity firms may focus on distressed assets or companies that are undervalued due to market conditions, with the aim of improving their operations and positioning them for growth when the market recovers. Similarly, during periods of market volatility, private equity firms may adjust their investment strategies or hold onto assets longer to wait for more favourable conditions. Private equity investments are also typically diversified across industries and geographies, which can help mitigate the impact of economic events on their overall portfolio. Overall, while macroeconomic events can certainly impact private equity investments, private equity firms typically take a long-term view and employ strategies to mitigate their effects.
The long-term view of private equity firms towards investing, coupled with their ability to weather economic cycles and adjust their investment strategies, can lead to outperformance compared to other forms of investment. By focusing on building sustainable, profitable businesses, and holding their investments for several years, private equity firms can create significant value for their investors. Additionally, the use of debt to finance their acquisitions can amplify returns when the investments perform well. As a result, private equity investments have been found to generate strong returns over the long-term, outperforming other forms of investment such as public equities.
Access to Capital
Private equity managers can generate strong returns during economic downturns by having access to capital, which allows them to invest in new opportunities and support existing portfolio companies. This is crucial because companies may need additional capital during a recession and having a large amount of uninvested capital or “dry powder” provides PE managers with the flexibility to do so without experiencing a liquidity shortfall. By deploying this capital strategically, PE managers can acquire businesses at attractive valuations, negotiate better terms, and potentially generate higher returns when the economy recovers. Therefore, access to capital plays a crucial role in enabling private equity managers to generate strong returns across recessionary periods.
As reported by S&P Global, the global PE industry had a record level of almost $2 trillion in dry powder by the end of 2022, which adds an extra layer of comfort for PE managers as they head into 2023. The ability to deploy this capital can help avoid any liquidity shortfalls in their existing portfolio companies, which can help protect their investments and generate strong returns. ⁶
During the Global Financial Crisis, having a strong reserve of dry powder proved to be incredibly valuable for PE firms. Companies backed by PE firms in the top quartile of dry powder reserves received 10% more investment compared to non-PE backed firms. This suggests that having access to capital can give PE managers a competitive advantage in acquiring new businesses and supporting existing portfolio companies, which can lead to generating strong returns.
Hands-On Management Approach and Expertise
Private equity managers actively manage their portfolio companies by implementing operational improvements, cost-cutting measures and strategic initiatives to drive growth and increase profitability. This hands-on approach enables them to have greater control over their portfolio companies, ultimately achieving better outcomes compared to passive investors.
PE managers’ expertise in specific industries allows them to identify opportunities and risks that others may miss. This knowledge enables them to make informed investment decisions, negotiate better deals, and add more value to their portfolio companies. During a recession, PE managers can leverage this expertise to help their portfolio companies navigate challenges, such as declining revenues, cost pressures and supply chain disruptions. By using their operational expertise, they can turn around distressed assets and create value for their investors, making them more likely to deliver strong returns during these periods.
Why Vantage’s Private Equity Growth Funds?
Vantage’s Private Equity Growth Funds provide wholesale investors with unique access to PE funds managed by Australia and New Zealand’s top tier performing private equity managers, that have a proven track record of delivering strong returns during economic downturns. Vantage’s underlying private equity managers have a distinct advantage in acquiring undervalued assets during a recession, which can lead to higher returns for investors when the economy recovers. As the global PE industry continues to accumulate record levels of dry powder, Vantage’s Fund of Funds offers access to managers who can strategically deploy this capital to acquire businesses at attractive valuations, negotiate better terms, which in turn generates a higher return over the medium to long-term.
In addition, Vantage’s underlying private equity managers take a long-term view when investing, with their strategies designed to weather economic volatilities. Through a highly diversified portfolio across different managers, financing stage, industry sector, vintage year and geographic regions Vantage’s Private Equity Growth Funds mitigate the risk of impact from economic events on the portfolio. Private equity managers actively manage their portfolio companies by implementing operational improvements, cost-cutting measures and strategic initiatives to drive growth and increase profitability. Vantage’s underlying managers active management style enables them to have greater control over their portfolio companies, ultimately achieving better outcomes compared to passive investors.
Vantage’s Private Equity Growth Funds are well-positioned to leverage these advantages and provide wholesale investors access to top tier performing private equity investments. Vantage’s currently open Fund Vantage Private Equity Growth 5 (VPEG5) offers a diversified portfolio of private equity investments designed to generate strong medium to long-term returns across all economic cycles.
To request further information on Vantage’s currently open fund, Vantage Private Equity Growth 5 (VPEG5), please contact your financial advisor or alternatively email [email protected] to request a meeting with a Vantage executive to learn more.
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Maximilian Tobin: Investment Manager
Madeline Newson: Analyst
 Preqin – Alternative Assets Data and Intelligence – Databases, Publications and Research. (2020). Retrieved 25 June 2020, from https://pro.preqin.com/dashboard/watchList
 Wilson, N., Wright, M., Siegel, D., & Scholes, L. (2012). Private equity portfolio company performance during the global recession. Journal Of Corporate Finance, 18(1), 193-205. doi: 10.1016/j.jcorpfin.2011.11.008
 Cliffwater, “An Examination of Private Equity Performance among State Pensions, 2002-2017,” updated May 2018. Source: https://www.psers.pa.gov/About/Investment/Documents/PPMAIRC%202018/21%20Cliffwater%20Research%20-%20An%20Examination%20of%20Private%20Equity%20Performance%20among%20State%20Pensions%202002-2017%20_c.pdf
 Lavery, P., & Wilson, N. (2022). The Performance of Private Equity Portfolio Companies During the COVID-19 Pandemic. Available at SSRN 4301174.
 McKinsey & Company. (2020). Lessons for private equity from the last downturn. Retrieved from https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/lessons-for-private-equity-from-the-last-downturn.
 Bernstein, S., Lerner, J., & Mezzanotti, F. (2019). Private equity and financial fragility during the crisis. The Review of Financial Studies, 32(4), 1309-1373.
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