One commentator on the industry impact of coronavirus recently paraphrased Churchill, saying: this isn’t the end, or even the beginning of the end but it might be the end of the beginning.
For private equity, it seems that the panic phase of coronavirus is largely over but the danger has not yet passed. Funds now know where the fires are burning in their portfolios and recovery plans are being put in place. However, the economic impacts in terms of lost revenue and margins, unemployment, consumer spending and inflation have not even started to be felt.
Despite this, there’s some optimism in private equity; the split between outlook over 3-6 months and 9-18 months is bifurcating with an increasingly upbeat view of the medium term.
For one thing, horror stories about quarterly valuations or mark to market for listed PE funds should be treated with caution. This is an accounting and reporting requirement and shows implied values right now, based on current trading and using somewhat depressed listed comparables. This is not what will actually crystallise at the point of exit and what matters in private equity are the actual cash to cash returns, not an arbitrary interim accounting measure. We should be reminded of the long-term growth model that to some extent shields private equity from disruptions in the wider economy.
I’ve heard many suggesting that, if you can survive the initial shock of this crisis, there are great opportunities to go for, with good companies needing investment and an expectation that valuations will be below recent peaks. However, phrases such as ‘once in a lifetime opportunity’ are being bandied about a bit too lightly as this is a complex area – few sellers will want to exit in the next few months unless they have to. Furthermore, a growth business that has come through this period intact could arguably demand a premium for that robustness, not a discount.
For private equity funds, the challenge in the next phase of this crisis will be deciding which opportunities to seize. Lots of investors are gearing up to race back to buying once the market re-opens properly, but many are also worrying about catching a falling knife.
Of course, it’s hard to know whether you’re at the beginning, middle or end of the crisis, especially as fears of second and third wave infections grow. The only thing that is certain right now is that funds are adapting rapidly to market challenges and demonstrating how robust this industry is. There’s plenty of work ahead, but at least now private equity is back on track with plans in place and light at the end of the tunnel.