The private equity industry in the US has had such a strong foothold even during the times of the pandemic that there will not be seen any harm made to the sector after the pandemic dies. The credit goes to the federal government’s support to the said sector in the form of CARES (Coronavirus Aid, Relief, and Economic Security) Act.
The taxpayers’ money will go in subsidizing the losses accrued by the PE industry so far.
What is CARES Act?
CARES, or Coronavirus Aid, Relief, and Economic Security Act is a relief fund launched by the United States federal government on March 27, 2020. Meant to address the economic downturn of the ongoing 2020 coronavirus pandemic, it will hand out an amount worth $2 trillion among the American Businesses and the general public. $500 billion will be invested in direct payments to US citizens, $208 billion in the form of loans to industries, and $300 billion will be distributed as crisis loans among the SMEs.
In the history of US, never came a stimulus package as big as this, amounting to 10% of the country’s GDP. The announced relief fund amount is more than double of what was handed out at the time of the Great Recession.
Every Industry in the US Wants a Chunk of the Declared Relief Fund
Since the time, it was first announced on March 27th, 2020, every single industry in the US has been eyeing for a significant part of the announced relief find. $2 trillion worth of capital is to be distributed, which is basically taxpayers’ hard-earned money. Hotels, restaurants, and airlines, all such sectors that have witnessed heavy losses in the wake of the complete lockdown orders have now aggregated to show their entitlement towards the fund.
US Private Equity Industry, the Wealthiest In the World, Seeks The Funds
Among the wealthiest industries of America and the World is the US private equity. As a matter of fact, it’s been estimated that a big share of the disaster relief fund will go to this very sector, the CEOs of which are among the world’s richest executives. The level of economic and monetary comfort US private equity firms enjoy at the moment, can be guessed by taking a glimpse at the amount of cash they have at the sidelines ready to be invested, which is $1.5 trillion.
Government Money Too, Rides on the Success or Failure of US PE Sector
One big reason why the federal government is handing out huge sums of tax-earned money to the PE sector is that some of the biggest investors in PE are the public pension plans. If the said industry goes in losses or loses its grip on the economy, the government itself would have to bear those losses. Private equity is just too big a force to reckon with to go in losses. It just can’t fail, or the federal government, as well as the economy, fails!
The irony of the situation is that while the biggest of private fortunes leveraging PE the sector was made by the CEOs of top private equity firms, now when the industry faces a crisis situation, public money is being pumped into the industry to bear the economic losses. One of the richest PE firms in America, i.e., the Blackstone Group makes one-third of its revenues from the retirement plans that are being set up by the government to provide for approximately 30 million US workers at the time of need. And therefore, if the investments of Blackstone tumbles, it will affect the payment of pensions to the working-class people of US in the long-run.
Loans at Low-Interest Rates Had Benefited the PE Industry Since Eternity
Private equity associations, in the 1980s, made strong efforts towards availing loans from the federal banks at low rates of interest, and since then, the private equity industry has benefited a lot from it, especially while carrying out LBOs. During the 1980s, the titans of the industry, like KKR’s Henry Kravis first burst onto the scene by buying businesses of highly-popular US manufacturers such as RJR Nabisco. Contrary to what venture capitalists do, i.e. investing money on new business ideas, top-of-the-chart private equity professionals buy the existing businesses by borrowing huge capitals from federal banks.
The era of borrowing of big sums of money by private equity investment professionals from federal banks began with the appointment of federal reserve chairman Alan Greenspan and it continues till day. The event marked the inception of the times from where the PE firms started benefiting immensely. As a result of this, even the great recession of 2008 would not have been able to affect the PE firms in the US. Besides, PE firms have been overpaying for the companies acquired by them. And as a result, they get indebted to such levels that even a mild recession can make them incapable of repaying their loans.
This has all happened because of the excessively-relaxed treatment towards PE by the federal government. At present, the portfolio companies of private equity firms in the US can easily refinance their debts at the lowest interest rates, thus receiving a fresh capital to continue on increasing their indebtedness.
Private Equity Will Flourish Even Through the Times of the Pandemic
Being run partly by retirement funds and public pensions, the PE industry has blossomed in the recent past. During the last four years, each year, as per data provided by Prequin, PE managers raised new money worth $500 billion to invest in the financial markets. Total assets of the industry in the form of monetary value go past $4.1 trillion, that is a record in itself. The sector is equipped with $1.5 trillion worth of dry powder, the highest ever. It amounts to more than double the amount of dry powder available five years go. The times between 2013 & 2018 witnessed a record number of PE deals in comparison to any five-year period in the economic history of the US.