PE investors face conundrum from virus cash crunch

Institutional funds hoping to raise their exposure to alternative asset class will find their patience tested

PE investors face conundrum from virus cash crunch

As stock markets around the world continue to plummet, one might expect an inevitable uptick in demand for non-correlated investments, including private equity. But the ongoing fallout from the global pandemic could force some investors into missing out on big returns.

According to a new report from the Wall Street Journal, data from Preqin show that median net internal rates of return for buyout funds from vintage 2008 and 2009 were 13.4% and 14%, respectively.

That meant investors who dialled back on private-market commitments during the 2007-09 crisis were unable to participate in some of the best performance from private-equity funds, Cambridge Associates Managing Director Jill Shaw told the Journal.

With that in mind, investors today are keener to place their money into new PE funds. But they might get sidetracked by the so-called “denominator effect,” which describes when a drop in public markets causes a portfolio to appear overweight toward private-market investments. When that occurs, they will have to rebalance holdings by slowing down or stopping their private-market investments.

“There’s a full recognition that the denominator effect is temporal,” Brenda Rainey, senior director of Bain & Co.’s private-equity practice, told the Journal. “Either markets will bounce back or the PE holdings will be written down.”

Rainey said that liquidity analyses are also part of large investors’ decision-making, with those predicting low on cash reserves being likely to hold off on new investments in the short term.

In a new survey by Eaton Partners, 70% of limited partners said the coronavirus outbreak is crimping their investment plans, and 52% viewed private equity is seen as the asset class that would best thrive amid market volatility stirred by the coronavirus. 

Despite the violent curve ball thrown by the global coronavirus outbreak, some institutional investors remain hesitant to shift course. That includes Connecticut Retirement Plans and Trust Funds, which manages approximately US$35.8 billion in assets.

“Given the long-term nature of private equity, we remain focused on executing against a strategic pacing plan that is designed to be measured and consistent,” CIO Laurie Martin told the Journal by email. “History has shown that attempts to market-time can be counterproductive and result in adverse consequences.”


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