Private equity is a unique form of investment with the potential for significant returns as well as devastating losses. Because private equity is distinct from other forms of investment, it can bring diversity to a portfolio, although investors should ensure they understand its unique nature, especially its many risks and potential for less transparency.
Once investors decide to invest in private equity funds, they need to consider timing. The current private equity market is in an interesting position due to the COVID-19 pandemic, with fewer investments in real estate and more in areas like medicine, especially radiology. A few specific private equity groups in the US and other regions have significantly increased their activity during the pandemic.
Increasing Investments from Some Private Equity Firms
While some investors have been discouraged by the global recession stemming from the pandemic, others have seen opportunity. For example, the private equity group KKR recently made a play for Coty’s professional beauty division, which includes the Wella and Clairol brands. KKR had been following the cosmetics company for nearly two decades, and the division was put up for sale last year. The coronavirus pandemic forced many bidders to withdraw their offers, but KKR stepped up to the plate with two deals that landed the firm a majority stake at a deep discount from the intended price. KKR is in the process of investing a billion dollars in Coty and recently took a seat on its board. KKR is in a unique position to take a bullish stance during the crisis with about $207 billion in assets.
Since the beginning of March, the top 10 private equity groups by number of deals have collectively completed more than $40 billion in transactions. This estimate comes from Financial Times via data collected by Refinitiv. The ranking actually includes 11 firms since two have a joint ranking, but the figure is still striking. By comparison, all private equity groups worldwide completed $103 billion in transactions in the final quarter of 2019. Furthermore, the $40 billion estimate is likely low considering that the inclusion criteria requires minority stakes be at least 3 percent to count. Thus, KKR’s $1.5 billion investment in Reliance Jio does not count, nor does Silver Lake’s $1 billion investment in the same company.
KKR’s high purchase volume is not a mistake. The firm’s strategy, as it related to the Financial Times, is to capitalize on volatility in the market, which makes it possible to buy high-quality businesses at low prices. Since March, the firm has used virtually every tactic for deploying capital to take advantage of this volatility. It has launched a multipronged approach to investing through a variety of different types of deals. While KKR is based in Europe, the phenomenon of increasing private equity investments during the pandemic has been mostly an American one.
Mixed Approaches from the Private Equity Front
Some European investors have tried to minimize their losses rather than investing more. For example, Cinven in London signed a deal in February worth more than €17 billion to buy Thyssenkrupp’s elevator business. This deal was the biggest buyout in Europe in more than a decade. Since then, Cinven has worked hard to reduce its exposure to the acquisition and has focused on attracting other investors to the deal.
Elsewhere, private equity executives have concentrated on shoring up their portfolio businesses, many of which were hit hard by the pandemic. In general, European private equity firms have less flexibility than American ones, due in part to the American focus on going beyond buyouts.
Of the 11 firms on the list of top dealmakers, eight are American private equity groups. These groups have focused on obtaining debt and equity stakes in companies hit hard by the pandemic recession. Firms focused on buyouts do not have the same flexibility as those willing to strike different kinds of deals to expand their portfolios. The deals included in the ranking list mentioned above include buyouts, stake purchases, and even add-on acquisitions, which is when a private equity group purchases a company to merge with one that it already owns.
Many of the investments include companies hit hardest by travel restrictions, such as Airbnb and Expedia. In addition, KKR, Cinven, and Providence Equity Partners all teamed for a takeover of Spanish telecoms company MasMovil through a deal worth €5 billion. This deal represents one of the largest since the start of the pandemic.
In general, the deals struck since March have fallen into three primary categories. Some deals represent the conclusion of negotiations that started prior to the crisis. Other purchases can be classified as either opportunistic or as part of post-crisis planning. In regard to this last category, many private equity firms are targeting tech companies that could gain momentum from the “new normal” of working from home. Moving forward, it does not seem like the firms taking a bullish approach are going to slow down in the latter two categories, even if deals from the first are basically complete. Currently, for example, Bain is making a bid for the assets of Virgin Australia.