The Hole is Big, Perhaps the Best Time to Think About Private Equity Ever

The coronavirus (COVID-19) has blown a hole in the global economy. In the European Union, Gross Domestic Product (GDP) receded 3.8% in the first quarter of 2020. In the U.S., first quarter GDP growth dropped off by 4.8%. In China, the start of the coronavirus pandemic, growth decline by a massive 9.8%. All indications are that second quarter may be even worse.

Second Quarter GDP

On the heels of the terrible first quarter will likely be the worst-ever GDP readings in the second quarter of 2020. Some economists have GDP in the U.S. declining by as much as 30% quarter-over-quarter (Q/Q) in the second quarter, with similar readings in the EU and less severe in China.

These incredibly weak projections suggest serious problems for the global economy heading into the third quarter of 2020.

A Picture Perfect Private Equity Opportunity?

The global economy will be in massive hole heading into the third quarter of this year. By some measures, a $20 trillion hole (on an annualized basis). With such a massive drop, why would now be a potentially picture perfect opportunity to invest in private equity? The answer really comes down to four factors occurring simultaneously.

First, barring an unexpected revival in the virus on a massive scale in the latter half of 2020, the second quarter of 2020 will likely be the bottom for economic activity. This means there will be a massive push to make up that $20 trillion as quickly as possible.

Second, in response to the global pandemic, governments have advanced massive spending measures. Early responses from G20 countries summed to at least $5 trillion. By the end of the Q2, spending measures will likely reach $10 trillion or more.

Third, at the same time as a bottoming in economic activity is happening and governments are spending incredible amounts of money to respond to this pandemic, central banks continue to lower interest rates (or keep them at historically low levels), offer liquidity funding, and engage in quantitative easing. The historically low interest rates make potential private equity deals more valuable than ever but for the drop in economic activity.

Fourth, occurring at the same time as the just-mentioned three is a new, revived push for innovation. Although individuals are mostly the same, the relationships individuals have with each other may have changed, at least for the next few years. Innovation always presents the opportunity for large gains for the good private equity investors. No doubt, in a couple of years the private equity industry will have a pretty good idea of which private equity firms are the “new” kings of innovation investing. It’s hard to wait.

Summing Up

Overall, the downturn in the global economy stemming from the coronavirus presents private equity investors with massive opportunities if invested well. There is perhaps no better time than now to invest in private equity.