Views On Economic Trends Shifting Among Private Equity Professionals
We interact with hundreds of institutional capital groups throughout the year – private equity funds, family offices, banking institutions, and the like – all of which have a mandate to invest capital. There exists a virtuous relationship cycle between investment banks and institutional capital. Our clients’ capital needs are solved by their capital and expertise, and these capital groups benefit from our deal flow. This dynamic results in frequent conversations with a variety of capital providers across the financing spectrum.
Although this dialogue is constant, the themes and subject matter are not. We saw an interesting shift in the second half of 2019: capital groups became highly interested (maybe even obsessed) with the term “CYCLICALITY.” Groups were eager to understand how a company would “cycle,” or in layman’s terms, how the company performs when the overall economy slows.
Assets allocated to private equity that haven’t been deployed (aka “dry powder”) are currently estimated at $1.0 trillion.[1] A lot of intelligent people are responsible for allocating this historic amount of undeployed capital and collectively they are concerned about the near-team effects of economic pullback, which is telling. Perhaps more interesting, however, is the prevailing conundrum this dynamic presents. The groups sitting on this record amount of capital have a mandate and incentive to put that capital to work and can’t simply “sit on the sidelines” in fear of an economic slowdown. This results in an increase in value for businesses whose models are insulated from the overall economy. If a business has demonstrated the ability to be cycle resilient the competition among interested parties and the prevailing price being paid is at historic – some may even say “bubble” – levels.
Regardless of what unfolds with the economy in 2020, business owners and executives are well served to understand how cyclicality impacts their business because it is certainly top of mind for investors. As consensus of an economic pullback builds among the financial community, and subsequent recession noise increases, remember what the investing GOAT, Warren Buffett, says of forecasts: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
[1]Pitchbook Q4_2019 “Private Market Playbook”
About Infinity Capital Partners
Infinity offers a full-suite of investment banking services for small and middle-market businesses. Headquartered in Oklahoma City, OK, the company has established a reputation working with closely held businesses with the utmost integrity, discretion and professionalism. For more information about Infinity Capital Partners, including a list of current projects, please visit our website at www.infinitycappartners.com.
