Massive wave of dry powder could keep away PE-backed bankruptcies, Monarch heads for $1bn on distressed fund in market dislocation, OMERS new PE chief doubles down on direct investing amid turbulence

Dry powder could stave off PE-backed bankruptcies in a pandemic-fueled downturn and Trivest's sale of Pelican Water Systems wins Small Market Deal of the Year.

Morning!

Hope all is well with you and yours.

Question for you, Dear Reader: what do you think about working from home? Once we get through this virus lockdown (hopefully sooner than later), the question will be, do we go back to work life as before? Or will this grand WFH experiment change the way we work? What do you think? How has WFH impacted your work? Reach me with your thoughts at cwitkowsky@buyoutsinsider.com.

Dry Powder: The level of uncalled capital across private markets — which Hamilton Lane estimates at around $2 trillion — will be a big help to propping up portfolio companies that need help in the pandemic-fueled downturn. That’s according to Erik Hirsch, Hamilton Lane’s vice chairman and head of strategic initiatives, who I spoke with recently about the environment and what could happen.

Hirsch said private equity dry powder, which are capital commitments from investors that GPs have not yet called, will be an important factor in the economic recovery.

“That money is an enormous weapon that’s poised to benefit the entire global economy. Once that gets unleashed, it will be doing things like keeping existing businesses around and allowing them to survive so they can eventually thrive, or going to businesses that, if private equity capital didn’t come around, they wouldn’t survive either.”

Hirsch believes we won’t see a wave of private equity-backed bankruptcies, in part because of all the dry powder that can brought to bear on challenging situations. As well, lenders aren’t likely to simply demand the keys to businesses that miss payments, a dynamic that generally occurred in the global financial crisis. In times of mass crisis, lenders have proven to be willing to work with corporate borrowers to help companies get through the challenging time.

Also helpful from the perspective of corporate borrowers, financing packages in recent years have been structured with light or even no covenants, meaning the borrower has a lot of flexibility before actually defaulting on the debt.

“Lenders, I would posit, are not anxious to take the keys to these businesses. What we’re hearing is they’ll be willing to work with companies and fund managers to provide every flexibility they can to let them come out the other side. The person best suited for the business is the fund manager. Lenders will be calling fund managers and saying, “I get it, we’re in the middle of a war, what can I do to help you?
“Does that mean everyone makes it? Clearly not, and there will be some bankruptcies despite everyone’s best efforts. But I don’t think you’ll see a tidal wave of that.”

Read my whole interview here on Buyouts on LP liquidity and concerns, subscription lines of credit, phases of recovery and creative ways for GPs to avoid big gross/net spreads on performance that can result from collecting fees with very little actual investing.

Hit me up with your thoughts on these issues at cwitkowsky@buyoutsinsider.com.

Also: Separate from this interview, PE dry powder is being touted by people who think private equity-backed companies should not have access to government emergency loans. The idea is private equity has so much money on the sidelines not yet deployed, that the industry should help itself and leave government stimulus to small businesses without this sort of cushion.

This misses the point — yes private equity firms should, and will, support their companies with further equity injections, if they need this kind of help. But businesses in America should have every support available right now, and government funds are part of that equation. We’re talking about millions of jobs in PE portfolio companies, and to exclude those because of an arbitrary affiliates rule that sets a 500 employee threshold for access to emergency funds misses the point. It should be about saving jobs until our economy gets back on track.

Top Scoops
I congregated over Zoom with a bunch of senior editors from around the PEI universe to record a podcast about the impacts of covid-19 and what we’re seeing almost a month into the lock down. We talked about PE and access to emergency government funds, fears (real or imagined) around LP defaults, secondaries, as well as credit markets, private real estate and the rise of digital infrastructure. Check it out here.

I’ve been all about podcasts in the shutdown — it’s one of my favorite mediums for transferring information and telling a story. Let me know what you think and if you’re an LP or GP, if you have interest in sitting (virtually) for a podcast interview, hit me up at cwitkowsky@buyoutsinsider.com.

Trivest Partners won our Small Market Deal of the Year with its sale of Pelican Water Systems in February 2019. Trivest held Pelican for six years, during which time the firm grew Pelican’s employee base to 65 staffers from 17 and top-line sales by 2.8x. But success didn’t come without snags. After buying Pelican in 2013, Trivest saw there were challenges the company had to overcome if it was going to flourish. Check it out here.

That’s it! Have a great rest of your day. Hit me up as always with tips n’ gossip, feedback or just to chat at cwitkowsky@buyoutsinsider.com, on Twitter or find me on LinkedIn.