January is done as we know it👋
Why Private Equity Makes $ During Recessions (written by a GS/Megafund OfficeHours Coach)
Many tend to ask whether PE firms will slow down during a recession, will they stop hiring? Let’s dive into the underlying reasons around why recessions are good for the Buyside generally…
3 Statement LBO Model A Entry Assumptions and Sources and Uses
Private equity firms make money in a recession by buying companies that are deeply undervalued and turning them around for a profit once the status quo normalizes. During a recession, many companies struggle to stay afloat and may be forced to sell assets, segments, or even the entire business at a discounted price. Further, pressure given the current economic environment (combined with a higher cost of debt) leads to companies also facing maturity risk with any long-term debt coming due. With blood in the water, private equity firms that are well-capitalized and have access to long-standing lender relationships can take advantage of opportunities to purchase companies at a lower cost basis and significantly enhance their investors’ returns.
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PRIVATE EQUITY AND RECESSIONS
Generally speaking, once a private equity firm has acquired a company, they will typically implement a number of changes in order to improve the company’s operating and financial performance. This may include cutting costs, streamlining operations, or divesting non-core assets. The goal is to increase the company’s revenue and profits, making it more attractive to potential buyers when the economy improves.
One of the ways private equity firms can increase a company’s value is through leveraged buyouts (LBOs). This is a transaction in which a private equity firm borrows a large amount of money to purchase a company, using the company’s own assets as collateral. The private equity firm then uses the cash flow generated by the company to pay down the debt. This can be a highly profitable strategy if the private equity firm is able to improve the company’s financial performance and increase its value before selling it.
But during a recession, the LBO is further compounded via distressed investing. Distressed investing involves investing in companies that are in financial trouble, such as those in bankruptcy or on the brink of bankruptcy. Private equity firms can purchase these companies at a steep discount and then implement changes to improve their financial performance and make them more attractive to potential buyers. While it is tricky to perform an operational turnaround when facing recessionary headwinds, well-capitalized private equity firms can purchase companies and “ride out the storm” until things normalize and then prepare the target firm for a disposition.
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Some private equity firms also focus on specific sectors or industries that are less affected by a recession. For example, healthcare companies are often considered to be more resilient during an economic downturn, and private equity firms that specialize in these sectors may have better chances to generate returns. Learn more through the link below
ALL SAID AND DONE, by the general definition — it makes sense why PE firms are hiring very actively right now and will continue to hire actively… we’ve been hearing about how some prep platforms out there are actually INCREASING prices going into a recession. We are not increasing prices, in fact — we’re decreasing. We understand inflation is real and how expensive small purchases such as eggs have become… for that reason itself and because we’re so confident in our coaching capabilities/have many coaches looking to help out Mentees — we’re offering this one at cost — https://getofficehours.com/pricing_page: CODE: JANSTARTER will take off $700+ TODAY ONLY for our Buyside Starter Kit!
CODE: JANSTARTER will take off $700+ TODAY ONLY for our Buyside Starter Kit!
Want to learn more about our Private Equity Curriculum? Click below to learn more
AVP Recruiting Webinar with Alex Christ (Full video)