07-03-2025
A weakening economy could help private equity
In normal times, dealmakers want the economy to rip. A rising tide lifts all returns.
But today, with both private equity and venture capital snared in a distribution drought, there might be a silver lining to darkening economic clouds.
State of play: Stocks are negative so far this year, in part due to President Trump's oscillating tariff policies. Consumer confidence is down, including among Republicans. Inflation remains stubborn. The February jobs report came in slightly below expectations, on the heels of the worst monthly layoff data in nearly five years.
The Atlanta Fed's GDPNow model predicts U.S. economic contraction in Q1.
The big picture: A giant reason why PE/VC funds have refused to sell or take portfolio companies public over the past few years is that they're waiting for valuations to grow into the inflated prices they paid in the first place (plus a premium). Particularly for deals done in 2020 and 2021.
In other words, this is a problem of dealmakers' own making, unlike during the dotcom crash or Great Financial Crisis.
Zoom in: Some investors may look at these two trends colliding and reach for the Maalox, but it's possible that today's economic challenges — short of actual recession — could become a forcing mechanism.
VC/PE funds absolutely need to clear the decks, particularly as AI makes some deals age prematurely, and it's a lot easier to swallow losses when macro arrows are pointing down.
Yes, this could make it harder to raise future funds. But if your LPs still believe the old marks, you probably need smarter LPs anyway. And if you never distribute, what exactly is your purpose beyond extracting fees?
The bottom line: Treasury Secretary Scott Bessent on Friday told CNBC: "MAGA doesn't stand for 'Make M&A Great Again.'"
So far he's been right, with deal activity lagging last year's pace. But there's a chance that he'll be proven wrong, for reasons he won't want to talk about.
