Private equity firms ended 2019 with a record $2.5 trillion in cash on hand, according to Bain Capital, and have even more now, Manoj Mahenthiran, private equity chief at accounting firm PricewaterhouseCoopers, told Bloomberg.
The pandemic and economic shutdown gave them a windfall.
As the U.S. Federal Reserve and other central banks drove interest rates close to zero, pension funds and other institutional investors turned to private equity companies to give them better returns.
As a result, the companies have more cash to invest than they have obvious places to put it.
Health care and tech have long been among private equity’s favorite targets. However, competition for deals in those sectors has pushed prices up, making it harder to find an investment likely to meet private equity’s ambitious profit goals.
Some equity firms now are trolling in the hospitality and retail sectors, where companies are starved for cash; Apollo Global Management has placed about $5 billion in airlines and aerospace companies from March through September, Apollo’s co-president said at an October conference, as reported by CNN Business.
Still, private equity firms are not rushing to sectors of the economy hardest hit by the shutdown, Mahenthiran said.
With so much cash to spread through the economy, “the economy is definitely trending toward more private equity ownership,” he noted; businesses owned by private equity companies already employ millions of workers around the U.S.
That trend to private equity ownership diverges from the increasingly popular “stakeholder capitalism,” which encourages businesses to weigh employees’ well-being and community impact as well as profits.
In contrast, private equity firms face little scrutiny from regulators and emphasize maximizing profits from the companies they take over.
In pursuit of those profits, private equity deals are noted for loading debt onto purchased companies. In 2019, more than 75 percent of private equity deals were “highly leveraged,” according to Bain Capital, which means companies were forced to take on debt no less than six times operational earnings.
That leverage leaves private equity investments at risk if companies they own see weakened sales.
During the economic shutdown, Chuck E. Cheese, Hertz, and J. Crew have been among high-profile companies that crumbled under a debt load piled onto them by their private equity owners.
But with cash to burn and more coming in all the time, private equity firms can afford to take risks while their tentacles spread wider across the U.S. economy.
TRENDPOST: Private equity firms are funded by the wealthiest of the wealthy. As the firms reach deeper and wider into our economy, the wealthy will exert a greater influence over our economy, reap a greater share of its profits, and leave less for the rest of us to get by on. Wealth also buys political influence, increasing the chances that politicians will hear the voices of the rich more clearly than anything the working majority has to say.
Thus, as we have long forecast, the Bigs will get bigger and small businesses will be pushed out of business or bought out. It should also be noted that the bigger they get, the less diversity of products and services will be available, leaving opportunities for OnTrendpreneurs® to fill the market gaps.
