A line for help with unemployment claims outside a career center in Frankfort, Ky., June 18.
Photo: bryan woolston/ReutersAbout $3 trillion of coronavirus relief approved by Congress helped the economy survive the pandemic, but what happens when the funds run out? With 40 million people out of work, it is time to unleash the power of private equity.
Private-equity firms are sitting on $2.5 trillion of “dry powder,” or uninvested funds, according to Bain & Co.’s Global Private Equity Report published earlier this year. Private-equity firms have been stockpiling cash amid stiff competition, rising asset prices and worsening economic conditions. The pandemic presents an opportunity to purchase undervalued assets—if the force of private equity is unleashed.
During the financial crisis of 2008, failing banks were bailed out by the government, which prompted a serious and deserved backlash. According to press reports, private-equity firms and their lobbying groups have requested stimulus funds for their holdings but so far have been rebuffed.
The Small Business Administration’s “affiliation” rule prevents companies owned by private-equity firms from receiving funds. Any change would be perceived as an indirect bailout to private equity, and in any event the industry has plenty of capital sitting on the sidelines.
The priority should be helping Americans get back on the job through new investment. One way the government could help spur private-equity activity would be to keep interest rates low, but a stronger move would be to reduce the capital-gains tax.
A 5- or 10-percentage-point cut in the capital-gains tax would encourage investors to inject funds into ailing businesses. For Congress, that would be a better investment than another $2.5 trillion in aid.
There will always be critics who claim private-equity firms load companies with debt, strip them of assets, then sell them at a profit to unsophisticated buyers. This is simply untrue. These assets are sold to other private-equity sponsors, strategic buyers or the public markets via an initial public offering.
Far from acting as “vampires,” as some politicians claim, private-equity firms save hundreds of businesses and thousands of jobs every year. Firms inject capital and expertise into failing businesses, often installing executives who have knowledge of the industry. Unlike hedge funds, which sometimes invest only for a few weeks or months, private-equity firms look at a longer time horizon.
Like most industries, private equity is suffering. Apollo Global Management, with $68 billion in assets under management as of the end of March, reported a first-quarter loss. But like others in the industry Apollo continued to invest, viewing the downturn as “a buying opportunity, pouring tens of billions of dollars into investments,” as the Journal recently noted.
Private equity didn’t turn its back on the markets, and the government shouldn’t turn its back on the industry. Private investors must play a major role in rebuilding the economy and getting America back to work.
Mr. Desoky is associate dean of academic programs at the Skema Business School in Raleigh, N.C.
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