Private Capital is the Best Economic Stimulus

Andrew Weinberg, Founder, Managing Partner & CEO of Brightstar Capital Partners contributes to

In response to the Covid-19 pandemic, governments around the world scrambled to provide life support for their ailing economies. In just the first few months of the crisis, more than 50 nations announced stimulus packages totaling an estimated US$10 trillion and central banks around the world pumped liquidity into the financial markets. Now that cases are spiking once more, people and businesses in the U.S. hope that our government will provide another economic package in the coming weeks. Given the enormous economic dislocation caused by the coronavirus, it is natural that individuals and organizations look to government to provide a fiscal cure.

But governments can’t do it alone. Over the long-term, the most consistent and effective source of “finance for good” – the essential capital to support innovation, job creation and economic progress – will continue to be private investment. And the private equity sector will provide a major portion of that investment, especially to small and mid-sized companies that were founded and run by families and entrepreneurs. In many cases, the government’s stimulus programs for those businesses have fallen short. Already, the majority of private equity activity involves middle market companies, with annual revenues between US$10 million and US$1 billion. There are approximately 200,000 of these companies in the U.S., employing almost 50 million people.

Private Equity Annual Deal Volume

Partnering with private equity is a good way for these companies to get the consistent capital they need. Consider the fact that private equity transaction activity has grown by 11% per annum over the last decade and now amounts to nearly $1.5 trillion every year. Furthermore, with dry powder estimated at US$1.7 trillion in July 2020, PE firms have ample capital readily available to invest, without having to wait for allocations from a reluctant political system. During this challenging time, we and many of our peers are ready and able to deploy capital, both to help current portfolio companies and enter into new partnerships. Across the industry, deal activity is rising after an initial slowdown due to Covid-19.

The positive impact of private equity – and its potential to do even more in the future – should not be underestimated. Investments by PE firms have empowered many great companies to grow and thrive, across international markets. Businesses owned by PE firms represent about 5% of GDP in the US and 1.5% of GDP in the UK, for example.

As we’ve done at Brightstar Capital Partners since Covid-19 hit, PE firms will continue to provide their portfolio companies with much needed capital infusions and strategic guidance. Good PE owners provide expertise across space and time – transferring best practices from a portfolio company in one region to that in another, and offering the seasoned expertise of operating partners that have seen similar crunch times at other companies before. PE funds with a long-term outlook to value creation enable investments that would not be made under quarterly earnings pressure, like cutting-edge data analytics and systems to enable timely, accurate, and predictive financial and operational reporting. This enables portfolio company leaders to make faster and more informed decision-making in the face of pandemic challenges.

Good PE firms are facilitators of growth. At Brightstar Capital Partners, we speak every day to the families, founders and entrepreneurs who run these companies. Their future is often intertwined with their customers, employees, suppliers and communities. They have learned to adjust and adapt through many crises, and are highly agile. But many of them do not just need the government stimulus to supplant lost earnings in this pandemic, they need investment capital to prepare themselves for rapid growth after the crisis is over.

Ultimately, the much-needed immediate stimulus that is (rightly) funded with government debt will have to be repaid. This can only happen when the economy grows again at rapid pace. Private capital, and in particular private equity, has proven through time that it is most efficient at allocating funds to those opportunities that provide the highest growth. And this is why ultimately private capital is the best economic stimulus in the long-term.