Informa Connect Global Finance
Leon Black, CEO of Apollo Global Management, speaks at a conference in Berlin
- As the stock market crashes and coronavirus spreads, PE shops are looking to ramp up in loans to help businesses through the crisis as well as investing in public equities.
- Business Insider spoke with bankers, lawyers and PE execs to understand how some of the largest shops are operating, as sales from plane tickets to draught beer at bars and restaurants plunge.
- At the same time, they're also putting out fires at their own companies hit by the coronavirus, as amusement parks, cruise lines, restaurants and bars, all take a huge hit.
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Market chaos is creating crises and opportunities. PE firms are scrambling to manage both.
As the stock market crashes and the global spread of coronavirus delivers a blow to sales from plane tickets to draught beer, private-equity firms - the giant managers of companies from book-seller Barnes & Noble to dating-app Bumble - are scoping out new investments.
But they're looking to ramp up in just about everything except actual private-equity stakes.
Firms like Apollo Global Management, Oaktree Capital, Blackstone, and Ares Management are staffed to buy debt in troubled companies. Others like KKR and Silver Lake have divisions focused on something not as closely associated with private investing: taking minority stakes in public companies.
These two areas of investing are expected to play a crucial role in deciding who owns what when the dust settles. And PE shops, equipped with hundreds of billions in unused investor dollars, are well positioned to snap up their selection of distressed assets while also offering liquidity to companies in need of support, according to bankers, lawyers and consultants.
But with deals put on pause because of economic turmoil, a near-term challenge for PE firms is putting out fires at their own businesses.
PE firms are busy communicating with their existing portfolio companies about how to maneuver the fluid situation, assessing business repercussions, and suggesting when to draw down on credit lines, PE execs, consultants and bankers said.
"The pandemic has spurred a period of greater focus by PE firms on portfolio companies - partly because of the challenges they're facing of both supply and demand, and partly because the current uncertainty has caused many deal and fundraising processes to stumble or pause," said Bryce Kempler, a partner with McKinsey & Co who advises private-equity firms.
Peter Martenson, a partner with fund placement firm Eaton Partners, said PE firms along with growth-equity and venture capital, are "triaging their portfolio aggressively" and that he expected private-equity to hold their assets longer to ride out the downturn.
The comments came from conversations Business Insider had with more than a dozen bankers, lawyers, PE execs and consultants since Monday to better understand how PE shops are planning their next moves.
The coming weeks and months will demonstrate how businesses weather the downturn, but already, PE shops are scrambling to aid companies in industries such as travel, leisure, and hospitality, creating loans aimed at carrying them through the period with their employee bases relatively intact and without a bankruptcy filing.
On the investing front, one PE executive told Business Insider that there wasn't much available to invest in at the moment outside of public equities - and that his firm, which is one of the largest, is increasingly focused on liquid investments like loans, bonds and public stock. He declined to speak publicly because he was not authorized to do so.
Meanwhile, one sponsor banker said PE execs were busy managing their portfolio companies, advising them on new policies in light of the coronavirus, but that they expected to be called upon in the near future to provide creative liquidity solutions for large, including public, companies, grappling with a slowdown as a result of coronavirus.
This person requested to speak on the condition of anonymity to preserve PE relationships.
Firms positioned for the downturn
Preqin data along with bankers and lawyers pointed to a handful of firms such as Apollo Global Management, Oaktree Capital, Blackstone GSO Partners, and Ares Management, as players whose distressed-debt divisions are positioned to pounce on the downturn.
These firms have not yet made big announcements about distressed investments related to the recent downturn. In the 2008 financial crisis, Apollo deployed more than $50 billion in four months, according to Leon Black in comments he made at a private-equity conference in February.
"A downturn would not be a bad thing for Apollo," he said at SuperReturn, which was held while coronavirus was ramping up and it was still unclear how it would affect the global economy.
Now, senior credit professionals are seeking out lending opportunities in businesses directly affected by the downturn, though they would not share specific deals or companies.
Cruise lines, bars and restaurants, live entertainment companies and airlines have all seen revenue plunge as a result of the coronavirus and are considered some of the most obvious areas of opportunity, PE executives and bankers said.
At the same time, portfolio companies under management of some of the same firms are taking a beating as a result of the coronavirus.
Hospitality names are taking a big hit
For one, Blackstone has poured billions of investment dollars into businesses now being slammed by the coronavirus.
One was the co-purchase of Merlin Entertainment, the large visitor attraction operator which controls amusement park Legoland in Florida. Legoland said on Friday that it would join other amusement parks in shutting down its theme and water parks through the end of the month to ride out the coronavirus.
Blackstone also bought a controlling stake in Great Wolf Resorts, the owner and operator of family oriented entertainment resorts including Great Wolf Lodge, in October. On Monday, Great Wolf announced it had closed all of its 19 resorts in 13 states because of coronavirus concerns, with plans to reopen April 2.
Two other large investments it made in 2019 were the purchase of the Bellagio from MGM Resorts International and U.S. warehouse properties from logistics company GLP in what was an $18.7 billion deal.
MGM announced Sunday it would close all of its resorts including the Bellagio as a result of coronavirus, while the affect of coronavirus on Blackstone's U.S. warehouse properties could not be immediately determined.
Reached for comment on Tuesday, a Blackstone spokesperson noted that the firm's investors "are and always have been long-term investors."
He also said that the firm has successfully weathered many crises in the past, including 9/11 and the 2007-2009 global financial crisis, and still delivered outstanding performance for clients. "Our confidence in this approach remains stronger than ever."
A private equity firm typically holds onto investments for five or so years, so a months-long slowdown doesn't necessarily translate to a financial loss for PE firms, but it will likely cause firms to change up how they manage their assets, including recapitalizing investments by selling stakes, experts said.
Fundraising put on pause
The uncertainty in the market, coupled with the inability to conduct on-site meetings, had put a pause on some but not all fundraising for PE shops, according to placement agents.
At the same time, some investors no longer have the appetite to put their money in illiquid investments this year, they said.
Alan Pardee, a placement agent with Mercury Capital, said that it's still early to predict how investors will react to the coronavirus and resulting market volatility, but from what he is seeing so far, there are a number of investors who are adjusting by scheduling video and regular conference calls as a substitute.
"We are aware of a couple [investors] that have said things along the lines of, 'I'm not doing any more illiquid strategies for the balance of the year,'" he said. " We'll see how the market sorts out, given the continuing downdraft in the public markets."
The coronavirus could also make more attractive areas of PE investing that are not as correlated with the markets, like litigation finance, life settlements, music royalties and needs-based real estate, like self storage, rental homes and medical offices, placement agents said.