Got 5 minutes? Emerge Stronger: Executive Insights for Uncertain Times is a weekly video series where we share perspectives on what we’re hearing from clients and the market about what companies are doing to navigate these challenging times and plan ahead for success.
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RODERICK CARMODY: Hi, I'm Roderick Carmody and in today's episode we'll be discussing the impact of COVID-19 on the private equity industry. Joining me today is Chris Clapp, the leader of CrossCountry's Private Equity practice and a recent addition to CrossCountry.
Chris, thank you for joining me and welcome aboard.
CHRIS CLAPP: Thanks for having me. Excited to be here.
RODERICK CARMODY: I appreciate it. Are you looking forward to getting back on the golf course after this is all over?
CHRIS CLAPP: Oh Roderick. Talking about things that are not emerging strong from COVID: my golf game.
RODERICK CARMODY: That's great. Okay, thanks for your time and looking forward to today's conversation.
And the first question: How has the pandemic changed the private equity industry?
CHRIS CLAPP: Yes, I think in order to address how the industry has changed, you first have to take a step back and look at where the private equity industry was leading up to the pandemic.
Private equity entered 2020 coming off of 11 straight years of growth and with 2.5 trillion of dry powder, an environment with record high valuations, low interest rates and intense deal competition. Now naturally, COVID threw a wrench in the plan and deals were put on hold as funds really were forced to scramble to get their arms around the liquidity of their portfolios and identifying which of their portfolio companies required new capital and triaging in order to weather the pandemic.
Now in present day what we're finding is that private equity funds have gotten their arms around the state of their portfolios and they are now actively exploring new transactions, and in certain situations actually executing these transactions even in this challenging environment. And Roderick, we fully expect that the private equity deal flow is going to continue to uptake as private equity emerges strong.
RODERICK CARMODY: So Chris, you seem pretty confident that PE is going to emerge stronger. What makes you so bullish on that prediction?
CHRIS CLAPP: That's a great question. At the end of the day, private equity learned a lot from the last major financial crisis of '07 and '08 where the private equity funds who were willing and able to invest found that the vintage of investments that they made immediately following the crisis performed the best. And that's because they had the benefit of executing those transactions with reasonable valuations and those investments had the ability to grow during a period of economic growth and stimulus.
So once again, what we're finding today is that private equity is actually very excited about looking for opportunities to put their capital to use and to really take advantage of the lower valuations, the reduced deal competition, and in certain situations, distressed assets are in need of liquidity.
RODERICK CARMODY: So Chris, that's on the inbound side, but what about the outbound side? Are PE firms looking to sell their existing portfolio companies into this market?
CHRIS CLAPP: Yes, that's an interesting question. So, what we're finding is that private equity, while they're very excited to acquire new businesses, at the same time, they're actually very reluctant and are actually electing to defer exiting their own investments due to the reducing of valuations. And so effectively what they're doing is they're extending the hold period for many of their portfolio companies.
RODERICK CARMODY: That's interesting insights. I appreciate that, Chris.
Besides COVID-19, what are some of the other big storylines that are driving the private equity industry as a whole?
CHRIS CLAPP: In June of this year, the U.S. Department of Labor issued new guidance that allowed 401k providers to include funds that invest in private equity. And by doing so, they've effectively enabled the average 401k investor to gain access to this alternative investment class. The goal of this new guidance was to increase the investment options for retirement savers.
That said, this was actually considered a very significant win for the private equity industry as a whole because it was a meaningful step forward and allowed them to gain access to the multi-trillion dollar 401k industry. And it's estimated that this new guidance may lead to up to $400 billion of new capital for the private equity industry. Once again, reaffirming our expectation that private equity will emerge strong.
RODERICK CARMODY: That's great, Chris. Thank you very much for your thoughts and insights. And it's exciting to hear that private equity appears to be emerging stronger on the backside of the COVID-19 crisis.
Chris, thanks again for your time. Really appreciate it. Welcome to CrossCountry, and I'll see you out on the golf course.
CHRIS CLAPP: Thanks, Roderick. Looking forward to it.