“Never let a good crisis go to waste”
Winston Churchill
Or, as Steve Schwarzman, perhaps a little less eloquently, once told me “the best time to invest in private equity is now!”.
To which I might add, with even less eloquence: right now!
Covid 19 represents an investment opportunity for private equity
The backdrop of Covid 19, aka the Corona Crisis, that still might spill into a larger economic crisis is of course tragic. But with potentially lower valuations and less competition it is also an opportunity for many GPs, and thus also for LPs.
With the Q1 equity market volatility behind us, as we wait for Q2 PE reporting, and with the dust in general starting to settle somewhat, it is a good time for both LPs and GPs to consider the impact Covid 19 will have on private equity.
This blog post provides an overview of some of the considerations and implications facing GPs and LPs. In subsequent posts I will examine each of these and more in greater detail.
Though not perfectly comparable, past crises can serve as a guide for the present
Especially the GFC can provide some clues as to what we might expect from the current crisis.
We can expect
Investments and exits to decline
Leverage to also decline, though the size of the Private Debt markets today will make it less critical than previously
With fewer exits, distributions to also decline. LPs should consider this in their cash management
Valuations, though with a lag to public markets, to decline steeply in the short term but also to stabilize alongside public markets
Pre-crisis investments to often have lower returns
Post-crisis investments to often do very well
Though there certainly is more to consider, Table 1 examines these items in more detail as will subsequent posts.
Table 1: Covid 19 possible impact on private equity
Source: PE Compass
The importance and impact will obviously differ from GP to LP as well as from LP to LP and GP to GP. And most importantly, it will depend very much on how and in what they have invested.
Nonetheless, it is a good starting point as GPs start triage on their portfolios and LPs begin to review their investment strategies and their portfolios.
Thoughtful portfolio construction can ‘stormproof’ your portfolio
Vintage, Strategy, Stage, and Sector are notably absent from Table 1. Not because they are not critical to consider or wont be impacted. But because they are all part of good thoughtful portfolio construction. And if done pre-crisis this would go a long way to already having prepared your portfolio for a downturn.
Consequently, the perhaps most important takeaway from Table 1 for LPs, is the need for thoughtful ex-ante portfolio construction. A future post will discuss portfolio construction in greater detail.
The extent of the crisis is still unclear
At this point we are at minimum faced with an unprecedented global healthcare crisis. And possibly an economic crisis the length and depth of which is hard to determine, as it will very much depend on the former.
Consequently, even if the threat of Covid 19 seems to have diminished in some countries and regions. It is still very relevant for LPs to consider their PE investment strategies and for GPs to examine and work with their portfolios. As mentioned, more on this in the next couple of posts.
Stay illiquid!
Kasper