Written by: Jordan Chan

Domestic governmental lockdowns, a complete halting of cross-border travel, and huge dislocation to global supply chains became the norm as a result of Covid-19. Demand for oil and energy plummeted, liquidity dried up, and capital markets took a scare, (before rebounding sharply). Therefore it comes as no surprise that one of the longest waves in Mergers & Acquisitions (M&A) history recently came to an abrupt end. According to data from Refinitiv, companies struck just $485bn worth of deals from April to July, down from last year’s $1tn over the same period.

Indeed, as of April 2020, the virus had sunken 66 M&A deals, ranging from the $32.9bn hostile takeover of HP by Xerox, to the $3bn WeWork-Softbank tender offer. Clearly, such events demonstrate that M&A is not a current priority, unless it concerns the survival of the company.

However, the private equity (PE) sphere seems to have bucked this trend and continued to boom, in particular the largest firms. Indeed, the top 11 PE groups by deal count have spent $40bn since March which equates to more than a third of the entire PE expenditure in the last three months of 2019. So what accounts for this glaring disparity between PE and everyone else?

This article will explore the concept of PE and its constituent parts. We will analyse the key factors which have allowed it to continue flourishing as a sector and become a so called ‘pocket of resistance’ that has weathered the economic storm.

What is Private Equity?

PE is an alternative asset class in which PE firms invest in securities of private or public firms with the aim of acquiring a minority or a majority share. Led by General Partners (GPs), the funds are composed of money pooled together by multiple investors, who become limited partners. These can range from pension funds, to insurance companies, sovereign wealth funds, and HNWI, who all hope to increase their return on investment over the fund’s lifecycle.

Once a company has been acquired, the PE firm applies its often aggressive managerial and operational, sector-specific knowledge to streamline the company and boost its profitability. The debt and interest is slowly paid back to the lenders with the cash flow generated from the company’s updated operations.

As the company’s balance sheet improves and its value increases, the PE fund can exit its investment, at which point all investors receive a share of the profit, corresponding to their original investment. Alongside this the GP will usually earn 2% in management fees and 20% in lucrative performance fees, an action which Jonathan Ford has negatively likened to ‘Money Heist’, the Spanish TV show which follows a group of robbers breaking into the Royal Mint in Madrid.

The most common type of PE transaction is the leveraged buyout, which takes on potentially risky multitudes of debt (from banks and institutional investors) to finance the acquisition of under-performing businesses. This debt can then be deducted from taxes, and also helps to multiply returns on investment.

So why has Private Equity flourished during Covid?

Low interest rates

Interest is the cost of borrowing money, usually expressed as an annual percentage of the loan. They affect businesses because interest rates determine levels of economic activity and asset prices. Hence the importance of a low rate cannot be overstated. PE funds in particular, are highly sensitive to these fluctuations since PE firms often use highly leveraged debt to finance its various activities. 

Therefore, since a low interest rate means borrowing money becomes cheaper, it follows that PE firms benefit greatly from this, and it is unsurprising that GPs are scanning avidly for under-priced target companies to add to their portfolios. This is especially the case during times of crises as high-quality businesses can be found at attractive prices. Indeed, the financial crash of 2008 saw a handful of PE firms conduct seven or more acquisition transactions in the relatively short period from Q4 2008 to Q3 2009 whilst interest rates were comparable to the situation today. 

Furthermore, low interest rates also tend to increase demand for alternative assets (PE, VC, derivatives, etc.) since low rates have left investors with inadequate returns on bonds and virtually no return on their cash investments. Hence, a swing to alternative assets would present investors with many benefits.

Record amounts of dry-powder

Accompanying the historically low levels of interest is the record $1.6 trillion in ‘dry powder’. This term refers to the committed, but unallocated, cash reserves maintained by PE firms to cover future obligations, purchase assets, and make acquisitions.

The importance of dry-powder in a time of crisis lies in the fact that firstly, it gives PE firms an additional layer of security to allocate further capital toward their portfolio companies. Because of this, weaker PE companies could use the capital to shore up its balance sheet and address cashflow issues. Meanwhile, this provides stronger companies the chance to channel investment into strategic acquisitions, grow their market share, and position themselves better in relation to competitors.

Secondly, this wealth of dry-powder gives PE firms the freedom to pursue promising opportunities as soon as they arise. In a hypercompetitive environment this profound backlog of cash reserves helps reduce the need to reach out and negotiate with lenders and credit suppliers for capital, which can be overly time consuming. Therefore having deep pockets gives the PE sector the additional value of taking advantage of high-quality businesses at attractive prices, at a time when most companies are moving to cost-cutting measures in an effort to survive the calamity.

Market Fear

Nationwide lockdowns have meant that millions of jobs have been lost and thousands of companies are fearing being at risk of defaulting on payments and declaring bankruptcy. Indeed, the last quarter has seen former industry behemoths and household names fall: Hertz, Chesapeake Energy, and JC Penny to name a few. Forming the latest additions of established companies that fell by the wayside, they surely won’t be the last either. Recently Edward Altman, creator of the Z Score (method to predict business failures), suggested that this year will ‘easily set a record for mega bankruptcies’, which are filings by companies with greater than $1 billion in debt.

Hence it is clear that business owners and employees are gripped with fear, particularly those involved in travel, leisure, and hospitality industries. Therefore it is little wonder that companies are now looking past traditional banks and government loans, instead towards PE firms for additional funding measures. Establishments which would rarely consider being the subjects of acquisitions are now seeing that route increasingly viable and, in some cases, crucial for survival. The injection of PE capital could potentially preserve jobs, help restructure companies, and provide it with a new, more suitable management team.

Furthermore it is worth pointing out the rise of shadow banking within the PE ecosystem, which Covid-19 has further hastened. In an era when stringent capital requirements have curtailed bank lending, private credit funds have increasingly stepped in to provide loans. Not only does this diversify the PE firms’ activities and bring in additional revenue streams, but it also poses a potential threat to traditional banks. A notable example of this is Leon Black’s Apollo Global Management which currently has $200 billion in its credit portfolio.


In conclusion, three main factors have outlined the resilience of the PE sector: low interest rates, record amounts of dry powder, and overall fear of the economic climate.

Instead of pulling back, experienced, innovative, PE players will capture the upside of this downturn by deploying its mountains of dry powder and taking advantage of the fear and low interest rates in order to advance their market position, scout new investments, and continually improve current operating models.