Despite the massive upheavals in the world economy and droves of people laid off, private equity companies are looking to swoop in and invest in companies for low prices, according to a CNBC report.
Those companies, like Blackstone, Carlyle and KKR, are in possession of more than $1 trillion in cash and could be ready to start using it as the coronavirus delivers death blows to companies in industries like travel, entertainment and energy.
Private equity firms have been holding off on making purchases as of late, with the markets’ success making it hard for them to justify spending as their business model usually involves buying undervalued companies with borrowed cash and turning things around for a sale at some point in the future. Now, though, the widespread closures and quarantine measures have created a fertile ground for private equity.
A half-dozen sources in the investment banking world, going unnamed due to the sensitivity of the subject, said Blackstone, Carlyle, KKR and their ilk maybe hadn’t expected something of this magnitude, but they had been looking for an opening by way of a market downturn for some time.
But with that newfound opening may come more intense criticism.
The industry is no stranger to controversy. Sen. Elizabeth Warren has leveled the critique that these types of companies make bank on the backs of workers and companies that sometimes end up bankrupt. And Federal Trade Commission (FTC) Commissioner Rohit Chopra said the companies were “waiting in the wings” like “vultures” for others’ misfortunes.
Banks have urged companies not to be enticed by private equity money while deals are being hatched in Congress, such as $2 trillion stimulus bill currently circulating. And private equity firms haven’t exactly escaped the effects of the pandemic, either, as they own large chunks of big firms and industries that have been crippled by the economic trouble.
But the private equity companies will come. The first wave will likely be investments rather than full-on takeovers, with private investments in public equity (PIPEs) being one way to do so, the report stated. Buyers gets a discount, and the new stock weakens the holdings of the shareholders that already existed.
Last week, Goldman Sachs warned clients that a spike in hostile takeovers, particularly involving shareholder rights plans, could be coming as well.
Despite the economic strife in virtually every industry, investors have been looking at some companies that could come out of all of this victorious, such as Airbnb, which has fielded calls from numerous investors as of late.