A recent Harvard-backed study confirmed that PE-backed companies are generally more resilient to downturns and can act as an economic stabilizer during a recession. In the study, PE-backed companies were found to be less likely to face financial constraints during the GFC, allowing them to grow and increase market share versus their peers. PE firms were also found to have been significantly more likely to assist portfolio companies with their operating problems and provide strategic guidance during the crisis. In fact, PE-backed companies invested 6% more and gained 8% market share versus their non-PE-backed peers during the GFC. As a result, PE-backed companies were 30% more likely to be acquired in the period post-crisis, with a greater potential for a profitable exit.

Ability to exploit the benefits of illiquidity. While it may seem paradoxical, private equity’s illiquid nature is an advantage in a recession, as it insulates investors from panic selling during the depths of a downturn. Panic selling almost always comes at a high cost, as investors often liquidate their holdings for below-market value. Meanwhile, PE managers have the benefit of a multi-year holding period, with the ability to patiently wait for more welcoming market conditions to exit their underlying portfolio companies. PE’s illiquid structure also renders PE’s correlation with the broader public markets of less importance, as the decision to exit an investment is put in the hands of professional managers who are closest to the underlying asset.

Given PE’s inherent attributes — a long-term investment philosophy, highly active involvement with portfolio companies, and fund structures that prevent fire sales — there is much for its investors to embrace across all market environments, but particularly in the face of market stress. Investors turning their thoughts to portfolio construction ahead of the next downturn should consider adding a private equity allocation, not only for its outperformance potential, but also to help provide a smoother ride.

Nick Veronis is co-founder and managing partner at iCapital Network. Tatiana Esipovich is a member of the firm's research and due diligence team. 



 

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