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Wary Private Equity With $2 Trillion War Chest Sits Out Carnage

Heather Perlberg

(Bloomberg) -- U.S. private equity firms hold about $2 trillion in cash, a useful position amid the current market carnage. But, for now, very few are putting that money to work.

Deal activity has ground to a halt and discussions with businesses hit by the panic around the coronavirus pandemic are evaporating, according to people with knowledge of the matter. Recently, an arm of Brookfield Property Partners LP pulled out of financing Mirae Asset Global Investments Co.’s acquisition of a $5.8 billion U.S. luxury hotel portfolio.

A representative for Brookfield declined to comment.

While a few firms are buying some debt amid a panicked sell-off, the lack of private equity dealmaking shows how the virus’s spread has upended the economic outlook and made even the richest and most sophisticated investors wary. Economists are predicting an historic slump in U.S. GDP and some have suggested the nation’s unemployment rate could hit 30%.

Alternative-asset managers have already asked companies they own to draw down credit lines to stave off liquidity issues, and firms currently fundraising are trying to speed things up so they don’t have to ask investors for money at a time of uncertainty, the people said.

As U.S. states and municipalities expand lockdowns and infection rates rise, many executives expect the government to step in with bailouts.

Despite the wariness, some debt shops are starting to buy senior secured loans and second liens from banks, according to the people.

Distressed-debt stalwarts including Apollo Global Management Inc. are jumping in with loans to battered companies, but others say they’re still evaluating the situation.

“It is too early to have a full understanding of the economic impact of this crisis,” said Dwight Scott, global head of GSO Capital, Blackstone Group Inc.’s credit arm. “We are working to understand the economic impact on different sectors and companies, identifying companies that we believe will ultimately recover.”

For now, the largest alternative-asset managers are trying to use their network of companies to minimize damage and help share resources.

Apollo connected Chuck E. Cheese executives with its grocery store chains Fresh Market Inc. and Smart & Final Stores Inc., and later sent furloughed Chuck E. Cheese employees to work at the supermarkets and distribution centers that were facing increased demand.

Carlyle Group Inc.’s technology team has been working with its companies to enable staff to work remotely. Blackstone has been connecting firms looking for deep-cleaning services with its ServPro business, while procurement teams have been helping its portfolios companies source masks, safety glasses and other personal protective equipment.

Private equity firms are also trying to calm skittish investors.

Pension funds, endowments and family offices that have money in consumer businesses such as restaurant chains, fitness centers or travel and leisure should expect to feel some pain, said Michael Rosen, chief investment officer of Angeles Investment Advisors.

One firm in northern California told Rosen last week that revenue at some of its portfolio companies had already dropped 80% to 100%. “It’s not apocalyptic, but it’s getting close,” he said.

Big institutional investors are less nervous and are using the uncertainty to push for better terms, such as lower fees after the commitment period, according to people with knowledge of the matter. They’re getting regular phone calls and updates from the largest managers, who are adjusting to doing business via Zoom video and dealing with a world where most of the workforce is at home.

Carlyle is “patiently and thoughtfully assessing opportunities,” co-Chief Executive Officers Kewsong Lee and Glenn Youngkin said last week on a global conference call for its limited partners.

“We as a firm are extremely fortunate for the tremendous amount of dry powder that all of you have committed to us,” Lee said on the call, referring to their unspent cash piles. “But it’s very early days still and we understand from experience the benefit of patience.”

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