There is a fine line of difference between a high recession and deep recession. A high recession is like shooting the economy with a bullet. The impact is quick, sharp and very targeted. However, a deep recession is like piercing a saw-tooth knife through the body of the economy. The death is prolonged, the pain excruciating and impact a complete bloodbath. With the decline in pretty much all the economic indicators of the US economy, further accentuated by the multi-billion write offs by no less known names in the industry, the economy is clearly into recession. In this context, it is interesting to observe the impact of a deeply recessionary economy on investments made by the trillion dollar private equity firms around the world and explore correlation with the sub prime mortgage crisis.The sub prime mortgage crisis stuck the US financial institutions after the banks realized that the securities traded for loan payments, which were expected from high default rate individuals, were bad investment vehicles. The big names in investment banking  had bought and sold these securities without being fully aware of the underlying transparency of the individuals responsible for loan repayments. All this was again based on an assumption that the housing prices would keep shooting towards the sky and gaining a refinancing for houses was a child’s play. Compare this with the investments made by private equity firms in high risk firms. The illiquid PE capital invested in firms which promise a high rate of return tend to be defaulted under a deep recession scenario. As is typically the case in debt financing for a leveraged buyout, the typical trend is that the firms rollup the interest payments after the expiry of the credit period (often 3yrs). As a PE fund is mostly an illiquid fund (with capital locked in for a min of 5yrs), a recessionary economy could result in the invested firm not performing to pay off the debt capital realized from PE firms.

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