* Apollo, Carlyle prepare for market disruptions
* Coronavirus could provide opportunities, managers say
* Cash held as "dry powder" hit record high in 2019
(Adds link to distressed debt story, background)
By Abhinav Ramnarayan and Chibuike Oguh
BERLIN, Feb 28 (Reuters) - Major private equity firms, which
have built up big distressed debt funds in recent years, are
ready to snap up assets on the cheap if the coronavirus outbreak
causes deeper market disruptions, executives told an industry
meeting this week.
Distressed asset investment took centre stage at the
SuperReturn conference in Berlin as financial markets reeled
from investor panic over the coronavirus outbreak which has so
far wiped $5 trillion off equities.
Industry officials debated when a global recession might
kick in and whether the coronavirus would be the trigger.
Billionaire private-equity chief Leon Black said his firm,
Apollo Global Management, which built its reputation on
investments made in the aftermath of the 2008 financial crisis,
was ready to deploy funds in the event of a global recession.
"A downturn would not be a bad thing for Apollo," he said
during a panel discussion.
Apollo, which manages over $300 billion in assets, invested
almost $50 billion in four months around the time of the 2008
financial crisis, and was prepared for a similar splurge should
there be another downturn, he said.
"At this point in the cycle, you do have to keep an eye out
for potential disruptions and we may already be seeing some of
that coming to pass," said Jason Thomas, global head of research
at The Carlyle Group, a $225 billion private equity fund.
Funds could invest in company credit, loans in particular,
which tend to decline proportionally to equity in a downturn
even though it's more senior in the capital structure, he said.
The more the senior the debt the higher the priority for
repayment in the event of a bankruptcy.
"Credit becomes relatively undervalued, creating a buying
opportunity irrespective of your views on the broader economy,"
Carlyle's Thomas said.
KEEPING POWDER DRY
Many private equity firms have been building up distressed
debt funds for several years, keeping a chunk of them on hold
for a downturn. Such "dry powder" among distressed debt funds
hit a record $77 billion globally in 2019, according to data
from Preqin.
Some distressed debt specialists told Reuters in January
that 2020 could be their year, with default rates tipped to rise
and an expected increase in the number of companies that will
struggle to service their debt.
The difficulty for these funds is predicting the end of
what has been a long economic growth cycle. Many have been
focusing on challenged sectors such as automobiles and energy
instead of looking for a particular flashpoint in the economy.
"The automotive sector is facing a massive cyclical issue
even before taking into account the coronavirus," said Chris
Boehringer, co-head of distressed debt for Europe at Oaktree
Capital, a fund with $122 billion of assets under management.
"It is a sector that is used to 20-25% of growth but was
actually down 20% last year. That, along with energy, are two
sectors where we see a lot of dislocations potentially coming up
and opportunities for us."
One private equity executive at the conference, who is
focused on distressed assets, told Reuters: "I signed up and
expected to have meeting requests from six or seven others with
a similar profile - instead, I had more than 50".
"Everyone here is trying to figure out when the cycle ends,
if this time is different. Maybe coronavirus is the first
trigger".
Opinion was divided on whether coronavirus could prompt a
downturn, with some saying the effect it has on supply chains
could intensify an economic slowdown.
"Coronavirus could throw things off kilter a little but in
terms of affecting certain industries we don't know yet just how
much. The best thing we can do right now is be prepared," said
Apollo's Black.
(Reporting by Abhinav Ramnarayan and Chibuike Oguh; Editing by
Emelia Sithole-Matarise and Edmund Blair)