The Pandemic Boosted the Case for PE

PE-backed companies bested their peers by tapping into their owners’ relationships with banks and management expertise, according to new research.

Illustration by II

Illustration by II

Companies got an edge from their private equity owners during the pandemic, adding to the evidence that PE can help firms survive downturns.

PE-backed companies significantly outperformed their unsponsored peers during the economic downturn unleashed by Covid-19 in 2020, according to the latest research from Paul Lavery from the Adam Smith Business School at the University of Glasgow and Nick Wilson from the Credit Management Research Centre at Leeds University Business School. Firms owned by private equity had higher growth in sales, assets, head count, and other key performance metrics in 2020 and 2021.

Sales at PE-owned companies increased 6 percent more than at other private companies, while total assets rose 10 percent more, according to the research.

“A number of studies have shown that private equity-backed firms appeared to be more resilient and performed better than similar private firms through the 2008/09 financial crisis,” the authors said in an email to II. “Our findings align with the hypotheses of PE-backed firms being more recession-resistant.”

These companies were able to take advantage of the expertise of their savvy PE owners as well as tap into their banking and other financial relationships at a rough time in the markets.

According to the authors, PE firms provided access to capital markets, lines of credit, pools of managerial skills, experience in turnarounds, and networks of business relationships. They added in an email that the capital injections and the operational improvements allow portfolio companies to act with more speed and agility during economic crises, including the pandemic.

Lavery and Wilson based the conclusion on a sample of over 1,500 U.K. companies that were owned by PE firms at the onset of the pandemic. They compared the financials of these companies to those of their private market counterparts, which are available to the public in the U.K.

The vast network that private equity firms have with lenders plays a key role in their portfolio companies’ success during market downturns. “The cost of debt may be lower and credit may be extended to [PE-backed] firms on more favorable terms,” Lavery told II. “PE [firms] often have negotiating power with the banks and often have built up strong relationships — which, of course individual mid-sized firms don’t have — so it can be advantageous to PE-backed firms when they require some financial restructuring.”

But the easy access to capital also has a downside. It may lead to excessive borrowing. According to the paper, 3.2 percent of PE-owned companies filed for insolvency during the pandemic period, while only 1.1 percent of companies in the control group did so.

“However, non-PE-backed firms in distress had a higher incidence of liquidation, while PE-owned firms more often negotiated formally with creditors to continue trading,” according to the paper. In another recent paper, Lavery and Wilson found that the financial distress caused by PE firms can persist even after they exit.

Lavery added that if a recession happens this year it may present opportunities for PE firms to hunt for new targets. “A recession can make for decent acquisition opportunities, often at lower multiples,” he said. “[But] funds need to balance ensuring the safety and survival of current portfolio with looking for new opportunities.”