Morgan Stanley Sees Private Equity Able to Deploy $2 Trillion

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(Bloomberg) -- Alternative money managers have amassed some $2.1 trillion of cash, with about $700 billion of that concentrated in buyout strategies, Morgan Stanley said in a report published Wednesday.

Shares of the money managers are trading at attractive levels, according to Morgan Stanley. The firm reiterated its buy-equivalent rating on Blackstone Group Inc., Hamilton Lane Inc., Partners Group Holding AG and said it’s becoming more positive on hold-rated Apollo Global Management Inc.

Coronavirus fears have ravaged the broader market and money managers are no exception, underperforming the S&P 500 Index since Feb. 19. But the group stands to gain once the volatility wanes and they can look for opportunity in the wreckage.

That said, private equity firms will experience “high short-term pain,” until the dust settles and opportunities emerge to snap up distressed companies and distressed debt, Steven Kaplan, co-founder of the entrepreneurship program at the University of Chicago Booth School of Business said. That’s reminiscent of what happened during the financial crisis.

“To the extent that this is a bad recession, they will take big hits on their existing investments, particularly those that they made in the last two years at very high multiples,” Kaplan said. “They are going to have to take down equity to pay off their capital call credit lines. The equity they call will immediately be underwater.”

Morgan Stanley Sees Private Equity Able to Deploy $2 Trillion

Recent conversations suggest interest in industries that have been the hardest hit -- energy excluded. Those that get government support could, however, reduce appetite, Morgan Stanley analyst Michael Cyprys said. “Alts typically have a watchlist of previously diligenced companies that Alts could move on quickly should the right price arise,” he said.

Think travel, leisure, lodging, and entertainment, Cyprys said, as well as companies in defensive industries with more easily defined growth prospects.

“Broadly, we expect Alts to focus on good companies that are in need of raising capital, particularly mid-sized companies that may have less access to capital than larger companies,” he said.

Elsewhere, Goldman Sachs in a “Where to Invest Now” report listed the 25 S&P 500 stocks that have lagged the most since the coronavirus outbreak. That list includes Norwegian Cruise Line Holdings Ltd., Royal Caribbean Cruises Ltd., MGM Resorts International, Carnival Corp., as well as Darden Restaurants Inc.

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