PE pros urge caution, flexible debt structures amid recession fears

A panel of private equity executives looking toward 2017 agreed that a U.S. recession lurks at some point in the future and said lining up favorable financing partners will be critical in the next downturn.

The two GPs and one LP on stage at the PartnerConnect West 2016 conference in San Francisco disagreed on how soon a more severe economic slowdown will kick in, but they said portfolio companies need to be ready for it when it comes.

Among the storm clouds on the horizon: weak U.S. job growth, downward pressure in the energy, retail and industrial sectors, lower corporate earnings, continued gridlock in Congress despite the outcome of the November elections and the prospect of higher interest rates.

Speaking at a panel called, “Bulletproofing Portfolio Companies for the Next Recession,” the buyout pros emphasized the importance of strong balance sheets, with the right debt providers.

“If you have a lender that will work with you, as you hit these bumps in the road you’ll more likely have the staying power to get through it,” said Kenneth Clay, executive managing director of Corinthian Capital.

It may be better to avoid more aggressive lenders looking to extract value or gain control of a company in favor of more relationship-based ones, he said.

“A recession is always coming – the question is how quickly,” Clay said. “As we look at potential headwinds, there are lots of things to be concerned bout. I think caution is warranted.”

Taking a more bearish view, Quinn Morgan, co-founder and managing director of Centre Lane Partners, said he expects a recession as early as next year. The election of Donald Trump could cause equity markets to take a double-digit percentage dive, not unlike the move following the Brexit vote, he said. A win from Hillary Clinton may spark a short-lived rally but attention will turn back to economic fundamentals, which continue to signal trouble.

“When we look at our portfolio we’re trying to sell everything that’s ready or sort of ready,” Morgan said. “The general mantra of the firm is do we really understand where cash is generated and what happens to it if we cycle down.”

Offering an LP perspective, Miguel Luiña, vice president, co-investment team, at Hamilton Lane said the firm doesn’t expect a recession in the near term, but a year from now there may be a higher chance.

“If you do think a recession is coming, the best place to be is in private equity, based on our data,” Luiña said. The key to weathering a downturn is diversification among private equity investments, he said. GPs need to put flexible capital structures into place to get through harder times.

The comments came at the Hotel Nikko San Francisco during the two-day conference on September 27 and 28.

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Photo by Buyouts staff