(Caroline Hartley)
Private equity (PE) investments are not listed on public markets. With money pooled from institutional and individual investors, PE groups buy companies they want to fix and flip, hoping to make a big profit. Since this investment class became popular in the 1970s and 1980s, PE’s patient, long-term investment approach has generally outperformed other sectors during a recession, posting some of its best post-recession returns. Here’s how acting more like a private equity can help you get through tough market patches.
How private equity handles bad markets
Private equity firms follow a long-term investment strategy, averaging around five years. They continue to invest during turbulent times, quickly doing due diligence (will this company add value?) to act on the kind of short-term buying opportunities that economic downturns create. By consistently buying when other investors stay away, PE is able to acquire promising assets at a greater discount.
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Like PE companies, individual investors can also make long-term strategic decisions. Sticking to a regular investment schedule and staying diversified, even in a volatile market, offers investors the opportunity to buy strong companies that may simply have been dragged down to attractive values along with the rest of the market.
Also, PE pools cannot withdraw their investments quickly or easily. That prevents private equity firms from panic selling; they tend to hold on to their investments through tough markets. Public market investors could benefit from similar patience and discipline.
What can private equity do that you (maybe) can’t?
Private equity funds know how to keep cash on hand in a variety of economic climates, giving them plenty of “dry powder” to use to act on deals. If they need money to take advantage of a short-term opportunity, they don’t necessarily have to worry about borrowing when interest rates are higher. This strategy can be more difficult for individual investors to imitate and requires planning (tracking income, expenses and savings). But if you have low debt and set aside a pool of cash that you can use when you need it, you could follow PE’s lead to act quickly when the opportunity presents itself.
Private equity firms also have access to people with experience and knowledge. Teams focused on value creation and sector specialists working exclusively on one portfolio can analyze market cycles and find opportunities that may not be readily apparent to the lay investor. Investors, this is where it pays to have access to knowledge; It is important to do your own research and due diligence before jumping into an investment.
Why private equity doesn’t always win
Recently, the number of private equity investment opportunities has declined, and the values at which private equity groups sell companies have declined, with further declines possible in the coming months. It remains to be seen whether PE will once again overcome this downturn, maintaining its overall outperformance compared to public markets.
In the meantime, try not to act on your fears during an economic downturn. Instead, take the same steps that saw private equity through previous stock market storms: focus on the long term, stick with investments you believe in, and look for new opportunities when the market trades at a discount.
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