Jon Gray: Don’t handcuff private capital in this crisis
This article is a part of a series in which the Financial Times asks leading commentators and policymakers what to expect from a post-Covid-19 future
The writer is president and chief operating officer of Blackstone
It’s easy to get discouraged by the headlines. The effects of the coronavirus outbreak and an unprecedented shutdown of the global economy are being felt by markets, businesses, and individuals alike.
A record 26m Americans have filed for unemployment in the last month alone. The IMF now predicts a possible loss of $9tn in global gross domestic product, more than the economies of Japan and Germany combined. Vix, the index which measures market volatility, surged to a record high in March, breaking a mark set in November 2008. And of course, equity markets fell sharply, more than 30 per cent, although they have begun to recover.
This mix of rapid dislocation and extreme uncertainty causes markets to seize up and stems the flow of capital to businesses. Banks and public market participants hesitate to invest or lend, except when it involves the largest investment grade companies.
Even the most deserving companies may not have access to capital when they need it most for survival, job preservation and growth. The ensuing domino effect creates an environment that perpetuates market difficulties, hinders recovery and punishes workers. And governments can only do so much to shore things up.
Into the vacuum, well before the “all-clear” sign has been called on this downturn, must flow private capital.
I know from experience that this will inevitably be met with cries that private equity, real estate funds and private lenders are vultures swooping in to profit from economic suffering. There will also be dire warnings about the expansion of shadow banking.
And yet the potential consequences are clear. Without private capital, more companies will fail. Even with private participation, there will not be enough cash to save every company and worker. But at least there exists a $1.45tn potential lifeline of capital from non-bank lenders and private equity firms, funded mostly by public pension plans.
We have seen this dynamic before, during the global financial crisis. To take one example, consider the way Blackstone dealt with Hilton, the hotel chain we had acquired for $26bn in 2007. During the crisis, the value of our investment declined by more than 70 per cent as markets dropped.
But we maintained our conviction and injected $800m of additional capital. This vital step gave the company the time and resources to expand globally and eventually hire thousands of new employees. We stayed invested until 2018.
In the current crisis, we have already seen private debt and equity capital at work in some of the industries most affected by the economy grinding to a halt. Private capital is stepping in to give companies including Airbnb, United Airlines and Expedia a fighting chance.
However, rescue capital is only the beginning. As volatile prices make it harder for companies to tap public markets, we are likely to see a wave of private investment into new, fast-growing sectors which are needed to help make the economy more resilient to future public health and economic shocks.
Companies and governments everywhere are going to have to focus intensely on logistics and supply chain resilience. During this pandemic, logistics workers have made heroic efforts to ensure delivery of emergency supplies, food and everyday goods, while many parts of our world have been shut down.
But private capital will be critical in the future to help companies meet the growing demand for ecommerce. There will be a need to build large-scale logistics technologies and develop state of the art, last-mile warehouses. This will enable us to be better prepared for the future.
Private capital will also be called upon to accelerate the testing, therapies and vaccines needed to respond to our new healthcare challenges. We must ensure there is sufficient funding for scientific research and product development as well as for the physical labs needed to conduct vital experiments.
Both established life sciences companies and new entrants need this support to innovate and, ultimately, to save lives. One recent example: Blackstone has announced a $2bn royalty, debt and equity collaboration with Alnylam, a leading biopharmaceutical company focused on medicines that use RNA to interfere with gene expression to treat diseases.
Some critics are already using the current crisis to renew their calls to ban or severely restrict private equity investment, and overseas investment more broadly. This would be deeply damaging to the economy in normal times. It is especially so during a crisis. We need all hands on deck — including a big push from private capital — to restart job growth and make our economy better able to withstand future shocks.