I have a running bet with a friend. Every time we hear the word “unprecedented” to describe the current situation, we chalk up a drink for when we’re allowed out of lockdown. It seems to have become the word of the moment, with everything described in uniquely stark terms. When it comes to private equity, however, we’ve been here before.
drxDATA’s primary analysis dates back to 2010; but in the past fortnight we’ve gone back to 2006 and the last financial crisis in 2007, to understand what lessons we might be able to apply to the private equity market in the remainder of 2020.
One key area that drxDATA is interested to understand is activity volumes. We know that the private equity marketplace has its own rhythm and dynamics with fundraising driving fund deployment, which in turn drives exits usually after 5 years. Therefore, with this context, is any recession in private equity going to drive a permanent loss of activity, or will the circumstances only postpone decisions that will inevitably occur?
From our research, it is clear that in times of crisis, the private equity marketplace has a “pent-up aggression” dynamic, where trading volumes and activity that are tied into deployed capital can be deferred, but not indefinitely. We saw this post-recession, where deal volumes rose; meaning that by 2011, the total activity was no different to if there hadn’t been a recession. This compares to the wider economy, which was materially smaller than it otherwise would have been.
It’s an open question whether this shock becomes one the wider economy can bounce back from immediately, or whether, as it persists, we are causing long-term structural damage to the economy’s future prospects for growth. However, when it comes to private equity, in terms of both Dry Powder and Assets Under Management in funds across the UK, which will need to be deployed in the near term, 2020’s market looks to set up to repeat the activity dynamics of the last recession.
Indeed, dry powder is 46% higher today than it was in 2008, and AUM is 69% higher than 12 years ago. What’s most intriguing about this bounce-back-ability dynamic of the private equity marketplace, is how we can expect this to play out through the COVID-19 shock. The exact moment at which the market returns and deals start occurring can’t be anticipated, as it relies on many political and public health decisions rather than economic ones.
However, the freeze that has hit the market has come on sharper than any through 2008 and 2009. In the last recession, the worst month was March 2009, which saw 14 private equity deals close. April 2020 saw only 6 completed. The question which naturally occurs to me from that is whether a sharper drop in activity will see a greater rise as volumes resume.
If the pent-up aggression theory holds true, the market un-freeze, whenever it comes, could well see a new high for market volumes in the UK.
Samuel Robberts
Director, Head of drxDATA
Email: sr@draxexecutive.com
