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Does PE Provide ‘Silver Lining’ to Potential Economic Downturn?

The most recent unemployment and wage data seem to have offered a respite — perhaps temporarily, perhaps not — to potential recession concerns. But should an economic downturn occur, reports cite private equity as a possible “silver lining.”

As the New York Times reports in reference to last week’s U.S. economic data: “For all the signs that the economy is humming, the current expansion doesn’t resemble past booms. The scars of the Great Recession run deep, and even after 10 years of growth, the kind of euphoria that marked the technology sector in the late 1990s or the real estate market in the 2000s is conspicuously absent.”

“The pace of the current recovery has been weaker than during periods like the 1990s, which is among the reasons wage gains were so tepid until recently. It even prompted some economists to assert that a subdued economy was the new normal.”

And, yet, the post states: “As recently as the start of this year, investors were worried that the economy could falter because of headwinds like a slowdown in Europe, the trade war with China and Brexit. This report should put those fears to bed — at least for the time being.”

Role of Private Equity

In preparation for those slowdown fears, strategists considered where potential strength in the alternative investments class might sit. One proposed place: Private Equity.

One such Mergers & Acquisitions piece was headlined “Investors preparing for economic downturn turn to private equity.”

While noting a potential overall downturn, the report states: “PE may prove to be a silver lining. While the public markets already began showing signs of weakening in late 2018, Preqin points out that “alternative assets weathered the storm of the last recession well.” As asset classes go, private equity is perceived as a safer haven in bad economic times.”

“PE firms are likely to see increasing interest from investors who are preparing for a downturn, according to the survey. ‘Private equity is clearly delivering for institutional investors, providing strong returns that are meeting and often exceeding expectations,’ says the report. ‘Investors remain committed to private equity, and the outlook for 2019 is positive.’”

The post continues: “Investors say they expect to be highly active in private equity moving forward: ‘almost a third (31 percent) are planning to commit more capital than they did in 2018 and a further 57 percent are planning to commit roughly the same amount.’ High absolute returns are one of the primary reasons why investors surveyed say they allocate to the asset class.”

Private Equity and Health Care

And within that PE opportunity, one sector getting a lot of attention: health care.

We previously noted the PwC report “Top health industry issues of 2019: The New Health Economy comes of age.” (Access the full report here.)

PwC writes: “The US health industry has often lagged other industries when it comes to modernizing. Once thought to operate outside the greater US economy, the industry—with its byzantine payment system, complicated regulatory barriers and reliance on face-to-face interactions—is being disrupted. Finally, there’s robust evidence that what PwC calls the New Health Economy is kicking into gear.”

Bain & Company has released its Global Private Equity Report 2019. As Modern Healthcare notes from the report: “Global private equity-backed healthcare deals rose almost 50% to $63.1 billion in 2018, the highest level since 2006.”

“The provider sector continued to be the most active, with global transaction value surging to $35 billion across 159 deals, compared with $18.9 billion across 139 deals in 2017, Bain & Co.’s 2019 private equity and corporate M&A report found.”

The post continues: “Provider deals also led investment domestically, at 84 transactions worth $23.2 billion—the vast majority of the total $29.6 billion of U.S. funding. Behavioral and retail health, physician groups and home care drew strong interest, according to the report.”