Bain & Co. slide deck
First-time unemployment statistics jumped from 211,000 to 281,000 for the week ending March 14. That really only encompassed layoffs in the most hard-hit areas like Seattle. Based on some preliminary numbers—Ohio Lt. Governor Jon Husted told NPR yesterday that 78,000 Ohioans filed in the first three days of this week alone—that could be ten times higher next week.
This is an unmitigated disaster for everyone and we have no idea what the economy will look like once this all gets under control. But one force in the economy has the time to wait patiently and the scruples to take advantage of this severe pain. That would be the private equity industry.
For years, private equity firms have been collecting and sitting on investor cash—“dry powder,” as it’s known in the industry. By last summer, the industry had $2.5 trillion in dry powder waiting to be deployed, a record level. PE firms buy distressed companies, mostly with debt (although they have enough equity to goose deals right now), loading that debt on the company and extracting value out for their own benefit. There are two things we know coming out of this crisis: companies will be more distressed and cheaper than ever to buy, and debt will be cheaper than ever to finance. Deal prices have been high but are finally falling, a perfect opportunity for the industry.
The firms know this too. I’ve obtained a March 15 slide deck from Bain & Co., a major management consultancy firm, that served as a kind of informational guide about COVID-19 for PE executives and CEOs in their corporate portfolios. On page 4, it gives the game away: “During and post this crisis, PE firms will be presented with unique opportunities to invest—important to be ready to act.”
Bain & Co. slide deck
Others have noticed the same impulse: a Goldman Sachs associate told Vox, “Corporate raiders and PE firms are sharpening their knives.” The bottom feeding may not happen right away, however. Private equity prefers buying with debt rather than equity, and the debt markets just aren’t complying at the moment, putting deals on ice. There have been almost no leveraged loan deals in the month of March. “While bargains will abound and publicly-traded companies can be picked up for a song, it’s not clear that credit markets on which PE now relies heavily will be in the mood to lend,” says Eileen Appelbaum, an expert on the industry.
Private equity portfolio firms also have a lot of corporate debt out there, which could experience defaults; the heavy investment in restaurants and retail is particularly precarious. There’s also nobody around to buy the collateralized loan obligations, the derivatives of leveraged loans that keep the market flowing.
That probably won’t last forever, and some deals are getting done. In Asia, where the crisis has advanced closer to the remission stage for the moment, Blackstone is buying Soho China Ltd., a Hong Kong-based property company. PE firm Najafi has made a bid for Tegna, owner of 66 TV and radio stations. And with all that cash, the industry has time. I’ve been told that there will be “pent-up demand” that will spill out in the future.
Bain & Co. slide deck
In its slide deck, Bain & Co. tells its portfolio managers to “define how you will outperform competitors through and beyond the crisis,” offering as an option writing an “M&A roadmap.” This suggests that deal activity, whether at the firm level or through the portfolio companies, is a path to success.
Where might private equity look? As the economy begins to recover, you’re going to have a lot of sick or functionally dead firms ripe for the taking. The possible areas of entry include health care, which could be particularly vulnerable. “A lot of the stimulus ideas are linked to beefing up our healthcare system, and that's a place where PE has been really busy this past decade,” Appelbaum says. Health care represented 14 percent of all buyouts in 2018, with 855 deals worth $100 billion, according to Appelbaum and her associate Rosemary Batt. Telemedicine, health IT, urgent care centers, and even hospitals that could be flipped for real estate would lead the shopping list.
The Bain slide deck lists health care, and also something more ominous. “Fear and uncertainty increasing demand for services enabling security and defence operations,” it writes, highlighting Leidos, a defense IT firm, as outperforming the markets. Real estate could be particularly attractive; PE firms could buy up single family homes or commercial properties now for a song, and sit on them until they come back in the recovery.
Bain did not respond to a request for comment.
What can be done? First, Congress needs to cover COVID-19 treatment and not just testing, to eliminate the huge immediate opportunity in surprise billing, an area dominated by private equity firms. Medical debt bill collecting is also a major private equity profit center. In the long-term, it’s hard to know how to prevent a private equity bonanza, beyond passing laws that prohibit the worst of the industry’s practices.
The New York Times lists 8,317 U.S. coronavirus cases, up from 5,881 when I checked yesterday (and 140 deaths). Johns Hopkins University has it at 9,415. The numbers are rising with more tests; while the COVID-19 Tracker shows 8,131 cases (132 deaths), they have 82,571 tests completed, up from 58,536 yesterday. The testing figures, while yielding exponentially higher cases, are trending positive.
Medicare for All (Who Have COVID-19)
Congress completed the “Families First” response bill yesterday, which guarantees free testing for everyone. That supersedes the incredible exchange between Representative Katie Porter (D-CA) and CDC director Robert Redfield, where she got Redfield to admit that the CDC has the authority, under the Public Health Service Act, to cover all payments as part of preventing the spread of “any communicable disease.”
That doesn’t only cover testing, and the provider visits needed to secure that testing. It covers all treatment of the communicable disease. It even says that “payment for the care and treatment of individuals subject to medical examination, quarantine, [and] isolation” in the statute.
Senator Elizabeth Warren is following up on Porter, her former student, by asking CDC to commit to picking up those costs as well. “It is critical that you clarify your response and your plans to use this existing CDC authority,” Warren writes in a letter, “in order to ensure all Americans who have or fear that they may have COVID-19 can afford testing and treatment.”
Redfield is slippery and will have to be pressured further. But it’s important to force the issue on these existing authorities. Warren, Bernie Sanders, Ed Markey and others kept insisting that President Trump invoke the Defense Production Act to compel industry to make critical supplies; he did it yesterday. This statute could serve as “Medicare for All (Who Have COVID-19).” Finding this in statute makes it easier to implement quickly.
Porter, meanwhile, has moved on to pushing the leadership in Congress to allow for remote voting amid the outbreak. Two House members, Mario Diaz-Balart (R-FL) and Ben McAdams (D-UT), announced yesterday that they tested positive for COVID-19. They almost certainly, given the gestation period, had it when they voted along with the rest of the House on the Families First bill early Saturday morning. The House floor is not exactly a place where social distancing is practiced. And lots of members of Congress are in the target age range where COVID-19 turns deadly (though Diaz-Balart and McAdams are younger).
Since the founding, you have had to be physically present to vote in Congress. The legislative branch needs to be able to continue its work, especially now, but it’s a threat to their health to show up en masse in the Capitol. Maybe there’s a way to do this informally with straw polls of membership and then social distancing on the floor, with bills passed by voice vote. But a plan needs to be made.
Today I Learned
- Robert Hockett on the need to mobilize the supply side. (Forbes)
- Bipartisan movement on fixing our supply chain vulnerabilities. (McClatchy)
- Guatemala ends flights from the U.S., ending the deportation of asylum seekers. (Los Angeles Times)
- Adam Levitin wonders whether a big debt moratoria is the better way to go. (Credit Slips)
- On the other side, Zach Carter writes that cash deployments restores faith in the system. (Washington Post)
- The notorious spring breaker video. Good Lord. (The Hill)
- Patent trolling on COVID-19 testing? With Theranos patents?? (Techdirt)
- More on supply chains from Beth Baltzan. (American Phoenix)