MARKET TENOR
Lenin is credited with saying, “There are decades where nothing happens; and there are weeks where decades happen.” March 2020 was the latter for Wall Street and Main Street. The government mandated shutdown of the economy to fight COVID-19 has produced a recession or possibly depression of unknown depth and duration. Of course, crises create opportunities; and rarely is the aftermath as bad as feared.
Liquidity and sometimes solvency are today’s crises to be navigated by private equity and credit-backed companies. A similar test occurred in 20082009 as the Great Financial Crisis (“GFC1”) unfolded, but the industry— especially private credit—has grown dramatically since then.
One big change we expect sponsors and investors to embrace is an emphasis on realism—i.e. what is compared to a proforma of what could be that characterized private investing in recent years.
Another is an intense focus on liquidity. We highlighted liquidity in our 3Q19 newsletter as a growing risk for the industry. In recent years investors accepted greater illiquidity and leverage to pad returns. Both travel on a two-way street that magnify returns when prices rise, and crush returns when forced selling occurs.
Private equity and credit rarely are forced sellers given the nature of the investment vehicles. But liquidity risk exists, and it may be acute as it relates to terminal values in which the pre-COVID era allowed funds to monetize investments at fantastic values through IPOs, M&A and dividend recaps. The post-COVID era likely will entail exit capital that is harder to source with pricing that absolutely favors investors.
FEATURE ARTICLE
Always Cash Flow and Earning Power
Also in This Issue
Updated Metrics for
Private Credit and Equity
Publicly Traded Private Credit
Venture Capital