LESSONS LEARNED: HOW WILL PRIVATE EQUITY BENEFIT FROM A GLOBALLY CHANGING REALITY?

The outbreak of COVID-19 reminded the world about the fragility of our economies and political systems. An external shock, leading to an economic decline, with interest rates already at an all-time low. The path to a sustainable economic policy was postponed once more. Contrary to the last global recession, banks are not the epicenter. In fact, the financial service industry could become a facilitator for a global economic recovery through its unique position. Consequently, we ask: can financial firms provide innovative services to overcome the growing inequality and give a new impulse to the global economy?

Furthermore, recent months have exposed several acute problems – a sharp divergence between Wall Street and Main Street. Equity markets have quickly recovered from their initial decline; however, especially the low-income sector faces lay-offs and reduced incomes for several months to come.

The US average hourly earnings increased, as job losses occurred mainly in the lower-income sector, illustrating the inequal nature of this recession. Keeping rates at such low levels any longer will further increase inequality in our society. Savings accounts, which are often the only accessible investment opportunity for lower-income households, are unlikely to yield significant returns soon. Moreover, particularly in emerging markets, a substantial part of the population has no access to banking services, rendering them even more vulnerable to this crisis. Providing these services provides a remarkable opportunity to close the wealth gap, but also invites a profound risk of execution failures.

Additionally, this low-interest-rate environment will severely diminish the margins for banks – they will have to reassess their business models. Innovative methods for estimating credit risks will become more significant, as any room for errors vanishes.