The private equity industry is carefully bracing for the next recession, after years of unprecedented growth.
That’s the assessment from Hugh MacArthur, Bain & Company’s head of global private equity, who has been attending the annual private equity conference SuperReturn in Berlin this week.
“If you look at the last 5 years of private equity including 2018, they’ve been the best 5 years in aggregate the industry has ever seen — more exits by value, more value of deals done, more funds raised by dollar — a tremendous period of growth,” MacArthur said.
Total buyout value rose 10% to $582 billion in 2018 (including add-on deals), ending the “the strongest five-year run in the industry’s history,” according to Bain’s global private equity outlook report for 2019.
But the music can only play for so long.
“We’re nine years into an expansion — how much further can we go?”, MacArthur asked. “There’s no definitive data on the timing of the next recession, but there’s just a feeling that we might as well prepare for it.”
Macro concerns
Other macro concerns include U.S.-China trade tensions and Brexit, among others, according to MacArthur.
Still, the mood from the aforementioned SuperReturn conference, which attracts some of the biggest names in private equity, including David Rubenstein, co-founder and co-executive chairman of The Carlyle Group, is that the next recession won’t be as bad as 2008 and that investors can take advantage of falling asset prices during the next recession.
“People are eager for the year coming out of a recession,” MacArthur said, pointing to 2010 as a recent example of an opportune time to invest, when asset prices were still low just one year after the 2008-2009 recession. “[Investors are thinking] yes, we’re going take some pain [during the next recession] but prices will go down and we’ll be ready to go.”
Tech sector
In terms of sectors, MacArthur says private equity investors still see technology in the U.S. and Western Europe as an attractive space that is able to weather the next economic downturn.
Within tech, the software industry is particularly attractive, as these companies tend to help other companies reduce costs and provide better user experiences.
“If you’re [a software company] that’s first to the table and [your product] replaces things that aren't working well, you’re much better positioned - you might take a downturn during a recession, but you’re not worried about a 25% fall in profits,” MacArthur added.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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