Jeff Bishop: Large Publicly Traded Private Equity Firms will be the Winners on the other side of COVID-19

While investors and traders are still trying to figure out the winners and losers on the other side of COVID-19.

Some losers are clear. Airlines, hotels, restaurants, and entertainment businesses are unlikely to recover quickly.

Firms in telehealth, conference call providers, and delivery services are clear winners.

Their businesses are thriving as scientists continue to work towards a treatment or vaccine.

Grocers and pharmacies will also hold up better than most other companies.

They have done brisk business during this crisis.

But today, I want to discuss one business that too many people have ignored.






Winning Big

One not so obvious winner will be large publicly traded private equity firms.

Smaller private equity firms face massive losses as a result of the pandemic’s economic aftermath.

The press will be full of horror stories of private equity backed companies that go bankrupt during the slow recovery period that most economists and observers now expect.

Private equity firms were all the rage in the last few years as institutions flocked to their financial strategies.

Hundreds of billions of dollars flowed into private equity coffers, and it seemed like a never-ending party.

The result of this activity: we had too much money chasing too few deals across the buyout space.

To maintain high returns that could meet investor expectations, PE firms used an astronomical amount of debt to purchase companies during the boom times.

The bill is about to come due for many of them.

There will be many bankruptcies amongst private equity-owned firms. The press will go from praising them as the saviors of retirement accounts and pension plans to vilifying them as the new robber barons and corporate raiders.

However, the giants of the industry will not only survive the coming storm.

But they will thrive.

They have enormous amounts of uncalled capital to shore up portfolio companies and invest in assets at prices much lower than were available earlier this year.

Consider what industry leader KKR (NYSE: KKR) has done since the crisis began.

They have purchased a large waste and recycling firm in the United Kingdom. The firm also invested in industrial real estate across Europe on very attractive terms since the crisis began.

They bought more than 10% of Dave and Busters (NASDAQ: PLAY) and started agitating for change.

All told, in the two-month window from March 1 through May 1, the firm closed on over $10 billion of new commitments across their fund platforms.

The firm also has $2.5 billion of cash and short-term investments in addition to our undrawn revolver capacity to invest or prop up portfolio companies. They also have $58 billion in dry powder, waiting to be called from its star-studded list of institutional clients for new investments.

Historically money invested by private equity funds during times of crisis has generated spectacular returns for its investors.

The end result of that is huge incentive fees and earnings for KKR and its shareholders. That should drive shares of KKR dramatically higher as the crisis reaches an end, and we finally see a recovery.

It’s Not Just KKR

Apollo Global Management (NYSE: APO) faces a similar outlook right now.

Along with tech-centric private equity firm Silver Lake Partners, Apollo is investing in travel site Expedia (NASDAQ: EXPE) to help the travel firm survive the current travel shutdown. They made huge bets on high-grade credit earlier in the crisis that has already paid off with huge returns for the firm and its investors.

Apollo has made about $50 billion in investments since the crisis began. It has a robust pipeline of opportunities in private equity and private credit as well in commercial real estate market.

Even after deploying $50 billion, Apollo still has plenty of cash to put to work in new opportunities. After their earnings call this month, Apollo had $1.5 billion of liquidity available on its balance sheet.

Also, their dry powder position was robust at the end of the quarter at $41 billion.

The economy is a perfect set up for Apollo. They are very value-conscious investors and resisted the urge to chase deal prices higher in 2019. Now, they are much better positioned than funds that paid up for assets before the coronavirus reached our shores.

The big plus here is that Apollos co-founders and leadership have a much better understanding of high yield and distressed credit markets than any other private equity firm.

Leon Black, Josh Harris, and Marc Rowan all worked with Michael Milken, the creator of these markets, during his time at Drexel Lambert.

They are putting that expertise to work in this environment. When everything began to unravel, they called all the capital remaining for the third Accord credit fund and were fully invested in a matter of days. They quickly formed the Accord IV and have already raised $1.5 billion.


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The Road Ahead

Private equity funds are buying up distressed debt to take control of firms in troubled industries. They are also calling capital to buy up the debt of portfolio companies to make it easier for them to survive the economic turbulence that lies ahead.

As is the case with KKR, Apollos investors should see huge returns from the cash invested in the crisis over the next several years. That means enormous profits for Apollo that will drive the stock price to new highs and beyond.

There is little doubt we face economic disruption or the rest of 2020. If we see a second wave of infections, asset prices will likely fall and create buying opportunities for firms like KKR and Apollo..

I’ll continue to eye both companies in the weeks and months ahead.

These are the types of companies that are poised for huge long-term gains. They also make ideal investments to use covered calls to help boost income.

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