How short would you like your Haircut?
With the quarter-end now in the rear-view mirror, private market funds will begin to assess any damage to portfolio investments after the setback in equities and the apparent dislocation in sections of the bond market. Early suggestions are for 'haircuts' of between 10%-50%, though valuing investments can be more of an art than a science!
There are other considerations too. Private equity firms already awash with cash are running into controversy as they argue they ought to have a slug of U.S. bailout money to help distressed portfolio companies. Meanwhile, after recent falls in publically quoted assets, many asset owners are likely to be overweight private assets within portfolios. This overweight in the asset class may pose a problem, as PE funds are now calling on capital commitments made some time ago but not yet called upon, from those very investors who are now potentially looking to raise, not commit more, capital to private markets.
MSCI and Burgiss try and assess the likely damage to private assets as a result of the COVID-19 crisis. In light of steep falls in equity markets and dislocation in some sectors of the bond market, the results are not unsurprising.
This CFA blog post looks at the potential impact on PE valuations as a result of the COVID-19 pandemic.
For compliance reasons, this paper is only accessible in certain geographies
As yet, the effect of contagion from public markets to private market debt is unclear, suggests Nikhil Chandra of Aviva Investors.
PE fund clients are warned to brace themselves ahead of what might be a significant reduction in values.
PE wants a slice of the bailout cake, despite being awash with cash. What should we make of this?
Challenges and opportunities await PE funds as a result of the COVID-19 pandemic. Proactive steps are required, with cash flow requirements of portfolio companies being paramount, as are covenant restrictions and borrowing limits.
How private equity operating groups are taking on the challenge of the coronavirus (McKinsey & Company blog, Apr 2020)
McKinsey interviews private market funds around the globe to see what crisis measures they are putting in place, and in what other ways they are assisting their portfolio companies.
The various approaches to valuing PE assets are discussed in this blog post from the CFA Institute.
How reliable are the valuations placed on investee companies by fund managers? This ICAEW paper investigates.
A new valuation method for private equity investments is discussed in this academic paper.
Pitchbook's webinar series focuses on cashflow management, something that will be paramount for PE portfolio companies now.
Private Equity Returns are Cyclical, but Timing Commitments is Very Hard (State Street Corp, Apr 2020)
State Street argues that while periods of market dislocation can offer GPs opportunities to buy companies at advantageous prices, timing the private equity market, particularly on exit, is difficult and presents its own risks.
Factset turns its attention to the numbers behind the growth in U.S. private equity market, and the amount of 'dry powder' that is available for investment.
FTSE Russell suggests that with the outlook for economies and earnings remaining uncertain, valuations that appear attractive now come with their own caveats.
The Investment Solutions Group provides insight into current US equity valuations and the impact on long-term returns.
This CFA paper looks across Europe to identify issues, benefits and disadvantages that might arise should DC schemes decide to invest more into private markets.