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Private equity and COVID-19: cause for concern?

Investments
COVID 19 Coronavirus

July 3, 2020

We surveyed several private equity managers to get a better sense of the impact of the COVID-19 crisis.

Allocators need timely asset and market prices to effectively make portfolio management decisions. While some private equity investors see the lack of frequent valuations as a positive characteristic, access to timely information is especially important where there appears to be a regime shift in markets, and the COVID-19 pandemic certainly qualifies for that. Investors are rightly asking themselves “should I top up my exposure to private equity?” or “should I reduce it via the secondary market?”.

Portfolio companies are typically only independently assessed annually. Fund managers do provide more frequent interim quarterly valuations, but these do not always match the economic reality for the companies being valued as managers retain discretion to ‘‘smooth out’’ valuation volatility.

300+
portfolio companies surveyed via their private equity managers

So, how can investors get this information in a timely manner? Rather than wait for valuations, we decided to get a better sense of the impact of the COVID-19 crisis on the capital structure, demand for goods and services, on the supply chain and the operations of the underlying companies we are invested in. At the end of Q1 2020 we surveyed several of the private equity managers we invest with, representing 300+ portfolio companies, across 36 funds, to understand how their businesses were performing and their expectations for the next 2-3 months.

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Key findings:

  • Growth in ‘‘covenant lite’’ loans and looser financial terms gives managers significantly more flexibility to manage capital throughout the crisis
  • Customer demand for products/services had a high impact
  • The impact to supply and operations remained low, indicating that businesses were able to effectively implement alternative working arrangements

For the full results and analysis, see the below paper.

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