Most apparently sound stewards of capital were revealed to be anything but during the 2007-09 financial crisis. Bank bosses were shown to have taken on too much risk. Star hedge-fund managers suffered losses. Nor have the years since then been kind. Banks have been tied up in regulatory knots and returns at hedge funds have been pedestrian at best.


Now another savage recession is in full swing and the performance of pe is a crucial question for investors and the economy. The leveraged companies and debt instruments in pe portfolios are vulnerable and much depends on whether managers can tide these investments over. Meanwhile they have amassed $1.6trn in dry powder that they can deploy on new deals. pe shops’ fate depends on whether the hit to their existing investments is nasty enough to wipe out the potential gains from dealmaking afforded by the crisis.


Start with the potential losses. In the first quarter of 2020 the four large listed pe firms, Apollo, Blackstone, Carlyle and kkr, reported paper losses on their portfolios of $90bn. That sounds big, but is just 7% of their assets under management, reflecting their ability to control how privately held assets are valued and, perhaps, their investment acumen. After an early scare pe firms’ shareholders have concluded that the outlook is fairly bright (see chart).


Even so, several other factors may have changed to work in pe’s favour. Much debt issued to back pe deals has become “covenant-light”, meaning that companies can endure a big slump in profits without triggering penalties from their lenders. Since the 2007-09 crisis many pe managers have also set up huge credit arms—for the big four firms, these now account for a third of their assets. They may give managers more in-house expertise and mechanisms for raising debt, making it easier to restructure the debts of fragile portfolio companies on favourable terms.


Bailing out existing investments will drag down returns for pe shops. It remains to be seen if buying opportunities can make up for that. Most pe managers hope to use their newly expanded credit arms to scoop up bombed-out loans and bonds with collapsed prices—Leon Black, the founder of Apollo, has said the opportunity is “massive”. But the volume of traditional buy-outs dropped sharply in March, and only a few firms have since made purchases. For years pe barons have boasted of their huge piles of dry powder, which, if spent in a downturn, might generate outsized returns. Now it is time to pounce.