Private Equity Can’t Always Get What It Wants

May 7, 2020 | News | 0 comments

 

Private equity firms have gone hat in hand to lawmakers to argue that their portfolio companies should get coronavirus assistance alongside Main Street companies. They’ve come up short in at least one big way, The Times’s Kate Kelly and Peter Eavis found.

A big sticking point is the “affiliation rule” for some lending programs, which essentially treats companies owned by a private equity firm as part of a conglomerate, rather than separately. This excludes them from aid based on company size. The main private equity lobbying group has tried to get an exemption.

Individual firms have also lobbied for help for their holdings. Carlyle, for instance, wants aid for troubled aviation companies — including three it owns that have applied for relief. One of them, PrimeFlight, said it had “not received any funding” yet.

Private equity has had some success. A big breakthrough was when the Fed expanded a $100 billion lending program known as TALF to accept most kinds of corporate debt, including many junk bonds, as collateral. The move came after Apollo presented an elaborate proposal to Jared Kushner, President Trump’s son-in-law and a White House adviser, and lawmakers.

Critics in Washington aren’t inclined to give them a break. Private equity firms “do fabulously well when their risky bets pay off, and they are the people arguably best positioned to absorb losses right now,” Bharat Ramamurti, a member of the congressional committee overseeing federal bailout efforts, told Kate and Peter.

It has been a somber earnings season, to say the least. A majority of big companies have now reported quarterly results and fielded questions from investors about what their future holds.

Profits are down, and worse is to come. S&P 500 earnings are on track to fall by around 14 percent compared with the first quarter of last year, according to FactSet. That would be the worst such decline since 2009, and pandemic shutdowns only began toward the end of the quarter. Analysts expect steeper declines in the second quarter (37 percent) and the third (20 percent).

Executives don’t know what’ll happen. It’s a time-honored tradition on Wall Street for companies to offer guidance on their future earnings. (Usually, these forecasts are just below the earnings the companies end up reporting.) Now, C.E.O.s are throwing their hands up: More than 100 companies in the S&P 500 stock index have scrapped regularly provided forecasts. Analysts are “flying blind,” one lamented to the FT.

So why are stocks up? The S&P 500 has risen nearly 30 percent from its March low all the same. Andrea Cicione of TS Lombard describes this as a “narrow recovery,” driven by the stocks of tech giants like Amazon that benefit from lockdowns. With so many companies withdrawing guidance, he says that bank earnings are the best forward-looking indicator — and that a huge spike in lenders’ provisions against bad loans “was an eye-opener.”

• John Authers of Bloomberg reckons that hopeful investors are “drawing the best possible conclusions” from earnings calls and discounting bad news.

Remember buybacks? Like a dispatch from a bygone era, companies’ first-quarter reports reveal how aggressively executives were buying back shares before the pandemic hit, with repurchases running 13 percent higher than the previous quarter, according to S&P.

• AlphaSense combed through the filings and calculated that 135 big companies (with a market cap of at least $5 billion) spent more than $40 billion on buybacks in March alone.

• Buybacks, dividends, overhead, capex and just about every other cash expense are now being cut, so second-quarter earnings reports will feel much more austere.

Source: The New York Times

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