February 28, 2020 / 12:39 PM / 4 months ago

As coronavirus fears grow, private equity eyes distressed investments

* Apollo, Carlyle prepare for market disruptions

* Coronavirus could provide opportunities, PE managers say

* Distressed debt “dry powder” hit record high in 2019

By Abhinav Ramnarayan and Chibuike Oguh

BERLIN, Feb 28 (Reuters) - Major private equity firms, which have built up big distressed debt funds in recent years, are ready to snap up assets on the cheap if market disruptions continue, senior executives said at an industry meeting this week.

Distressed asset investment took centrestage at the SuperReturn conference in Berlin as financial markets reeled from investor panic over the coronavirus outbreak which has so far wiped $5 trillion off equities.

Industry officials debated when a global recession might kick in and whether the coronavirus would be the trigger.

Billionaire private-equity chief Leon Black said his company, Apollo Global Management, which built its reputation in the aftermath of the 2008 financial crisis because of its investments then, is ready to deploy funds should there be a global recession.

“A downturn would not be a bad thing for Apollo,” he said during a panel discussion.

He said Apollo, which manages over $300 billion in assets, invested almost $50 billion in four months around the time of the 2008 financial crisis, and was prepared for another such splurge should there be another downturn.

“At this point in the cycle, you do have to keep an eye out for potential disruptions and we may already be seeing some of that coming to pass,” said Jason Thomas, global head of research at The Carlyle Group, a $225 billion private equity fund.

Carlyle funds would look to invest in company credit, loans in particular, which tend to decline proportionally to equity in a downturn even though it’s more senior in the capital structure, he said.

“Credit becomes relatively undervalued, creating a buying opportunity irrespective of your views on the broader economy,” he added.

KEEPING POWDER DRY

Many private equity firms have been building up distressed debt funds over several years, keeping a sizeable chunk of them on hold for a downturn. Such “dry powder” among distressed debt funds hit a record $77 billion globally in 2019, according to data from Preqin.

The difficulty for these funds is predicting the end of what has been a long economic growth cycle. Many have been focusing on challenged sectors such as automobiles and energy instead of looking for a particular flashpoint in the economy.

“The automotive sector is facing a massive cyclical issue even before taking into account the coronavirus,” said Chris Boehringer, co-head of distressed debt for Europe at Oaktree Capital, a fund with $122 billion of assets under management.

“It is a sector that is used to 20-25% of growth but was actually down 20% last year. That, along with energy, are two sectors where we see a lot of dislocations potentially coming up and opportunities for us.”

One private equity executive focused on distressed assets who attended the conference told Reuters: “I signed up and expected to have meeting requests from six or seven others with a similar profile - instead, I had more than 50”.

“Everyone here is trying to figure out when the cycle ends, if this time is different. Maybe coronavirus is the first trigger”.

Opinion was divided on whether coronavirus could prompt a downturn, with some saying that the effect it has on supply chains could intensify an economic slowdown.

“Coronavirus could throw things off kilter a little but in terms of affecting certain industries we don’t know yet just how much. The best thing we can do right now is be prepared,” said Black of Apollo. (Reporting by Abhinav Ramnarayan and Chibuike Oguh, Editing by Emelia Sithole-Matarise)

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