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How Private Equity Can Teach You to Resist Recessions

Private equity (PE) investments aren’t listed on public markets. With money pooled from institutional and individual investors, PE groups buy into companies they want to fix up and flip – hopefully for a hefty profit. Since this investment class became popular in the 1970s and 1980s, PE’s patient, long-term approach to investing has typically outperformed other sectors during a downturn, posting some of its best returns after a recession. Here’s how acting more like private equity can help you ride out the market’s rocky patches.

How private equity handles bad markets

Private equity firms abide by a long-term investment strategy, averaging around five years. They keep investing during turbulent times, quickly doing enough due diligence (will this company add value?) to act on the kind of short-term buying opportunities that economic lows create. By steadily buying when other investors stay away, PE gets to acquire promising assets at a deeper discount. 

Image source: Getty Images.

Like PE firms, individual investors can also pursue long-term strategic decisions. Sticking to a regular investing schedule and staying diversified, even in a volatile market, offers investors an opportunity to buy into strong companies that may simply have been dragged down to enticing values alongside the rest of the market.

In addition, PE groups can’t quickly or easily cash out their investments. That keeps private equity firms from panic selling; they tend to hang onto their investments through rough markets. Public market investors might benefit from similar patience and discipline. 

What private equity can do that you (maybe) can’t 

Private equity funds know how to keep ready cash handy in a variety of economic climates, giving them plenty of “dry powder” to use to act on deals. If they need money to seize a short-term opportunity, they don’t necessarily have to worry about borrowing when interest rates are higher. This strategy may be harder for individual investors to imitate, and it takes planning (income, expenses, and savings tracking). But if you have low debt, and you set aside a cash fund you can tap when you need it, you could follow PE in quickly acting when opportunity knocks.

Private equity firms also have access to people with experience and expertise. Focused, value-creating teams and sector specialists who work exclusively on a portfolio are able to analyze market cycles and find opportunities that may not be apparent to the lay investor. Investors, this is where it pays to have access to knowledge; it’s important to do your own research and due diligence before jumping into an investment.

Why private equity might not always win

Recently, private equity’s number of investment opportunities has dwindled, and the values at which private equity groups sell companies have declined, with further drops possible in coming months. It remains to be seen whether PE will once again weather this downturn, maintaining its overall outperformance compared to the public markets. 

In the meantime, try not to act on your fears during an economic pullback. Instead, take the same steps that saw private equity through previous stock market storms: Focus on the long term, stick with investments you believe in, and search for new opportunities when the market’s trading at a discount. 

The Motley Fool has a disclosure policy.

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