Private Market Performance in Recessions

By: Gridline Team | Published: 05/11/2022
 | 
Est. Reading Time:
2 minutes

2020 and 2021 witnessed unprecedented quantitative easing to pull economies out of a pandemic-induced downturn. The printing presses were running around the clock and it worked, leading to an incredibly fast economic recovery and a soaring bull market.

After seeing inflation spike to four times the target, central banks have taken their foot off the gas, and are now going in the other direction. They are tightening monetary policy and withdrawing stimulus, leading many to worry about another economic downturn.

Historically, out of 9 recessions since 1961, interest rate increases have led to a recession 8 times. With the US Fed increasing rates by the largest amount in 22 years, and many more central banks following suit, it’s no wonder that people are worried about a repeat of the past.

Private markets, however, can provide resiliency in downturns. They are not as vulnerable to the same interest rate volatility as public markets, and they offer opportunities for investors to make money when others are losing it.

Private Markets Outperform in Recessions

When the economy takes a turn for the worse, private equity investors can take solace in the fact that their investments have historically outperformed public equities during downturns.

This was borne out during the dot-com bubble of the early 2000s and the Great Financial Crisis (GFC) of 2007-2009. Private equity funds fared better than public markets in both cases, with a less significant drawdown and quicker recovery, as shown in a Neuberger Berman Group study.

During periods of economic uncertainty, private equity’s focus on long-term value creation can be a major advantage. Private equity firms are not as beholden to the ups and downs of the stock market and can take a more patient approach to investments.

In addition to outperforming stocks in periods of economic decline, private equity has also proven to be more resilient to catastrophic loss.

As an Investments and Wealth report highlights, only 2.8% of buyout funds experienced catastrophic loss during recessions, while 18% of buyout deals lost 70% or more of their paid-in value. In comparison, 40% of stocks experienced catastrophic loss during the same periods.

Why Does PE Outperform?

There are several factors explaining PE’s outperformance during recessions. One is that private markets are characterized by longer holding periods than public markets, which allows for a more patient and active investment strategy. Further, PE firms have an asymmetric information advantage, with access to a deep bench of talent and resources. Additionally, PE firms are typically well-capitalized, with dry powder that can be used to alleviate financing concerns and help renegotiate loan terms and debt obligations.

Moreover, the common buy-and-build approach used by PE firms can be particularly effective in down markets. This approach allows for the acquisition of add-on businesses at low prices, which can then be integrated into the portfolio company to drive efficiencies and cost savings. Additionally, sector specialists with experience in a specific industry are often able to navigate through market cycles better than generalist investors.

Finally, the relative illiquidity of private markets can actually be protective in times of economic downturn. This is because panic selling is less common in private markets, as investors are typically more committed to the long-term success of the investment.

Download this article for later.
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque.
Share this Article
Terms of Service | Privacy Policy | GLBA Notice


Disclaimer
This site is operated by Gridline Holdings, LLC ("Gridline"). Gridline does not give investment advice, endorsement, analysis or recommendations with respect to any securities. All securities listed here are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Gridline has not taken any steps to verify the adequacy, accuracy or completeness of any information. Neither Gridline nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy or completeness of any information on this site or the use of information on this site. By accessing this site and any pages thereof, you agree to be bound by the Terms of Service and Privacy Policy

Past performance is not indicative of future results. All securities involve risk and may result in significant losses. Investing in alternative investment funds is inherently risky and illiquid, involves a high degree of risk, and is suitable only for sophisticated and qualified investors. Investors must be able to afford the loss of their entire investment. Alternative investment funds should only be part of an investor’s overall investment portfolio. Further, the alternative investment fund portion of an investor’s portfolio should include a balanced portfolio of different alternative investments. Investments in alternative investment funds are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or limited liquidity. Investments in Alternative investment funds are generally highly illiquid and those investors who cannot hold an investment for the long term should not invest.

Any specific alternative investments funds referenced on this site are included purely for illustrative purposes and selected based on name recognition. Such examples are only partial, and readers should not assume that the investments identified were or will be profitable or are representative of investments by the alternative investment funds identified on this site. There is no guarantee that any alternative investment fund will achieve the same exposure to, or quality of, investments held by any existing fund referenced on this site.

Nothing on this page shall constitute an offer to sell or a solicitation of an offer to buy an interest in any investment partnership or other security. Any offer to sell or solicitation of an offer to buy an interest in an investment partnership may be made only by way of the partnership's final definitive confidential disclosure document and other offering and governance documents of any given fund (collectively, “Offering Documents”). The information on this site is qualified in its entirety and limited by reference to such Offering Documents, and in the event of any inconsistency between this site and such Offering Documents, the Offering Documents shall control. In making an investment decision, investors must rely on their own examination of the offering and the terms of any offering. Investors should not construe the contents of this site as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security.

The information included in this site is based upon information reasonably available to Gridline. Furthermore, the information included in this site has been obtained from sources Gridline believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, and no liability is accepted for the accuracy or completeness of any such information. This site may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.

© 2023 Gridline Holdings, LLC