Private Equity
Opportunities Arising
from the COVID-19 Pandemic

May 11, 2020

Coronavirus May Be a Hit for 2018/2019 Private Equity Vintage Funds

Before the pandemic hit, forecasts suggested that 2018/19 vintage funds would likely struggle to make decent returns this year as they faced record high asset pricing and intense competition. But once the markets settle down from the current volatility, vintage funds will be ideally placed to acquire portfolio companies at the bottom of the pricing curve, according to research from financial data and information provider Preqin and risk management consulting firm FRG.²

While a recession certainly poses material risk to portfolio companies and exits today, it may also represent a record opportunity for fund managers to buy at low prices after the longest bull market in history.¹

“In the coming months, investors will have to look at the disruption in financial markets and ask if they are ideally positioned to achieve their investment goals,” Dmitri Sedov, Preqin’s chief product and marketing officer, said in a statement. “Many have looked to private equity to help provide returns through good times and bad, and so the need to accurately predict their cash flows in this area is critical.”

Falling asset prices could mean that 2018 and 2019 vintages are more likely to outperform.²

Net IRR Range of Buyout Funds by Vintage Year: Baseline vs. Pandemic Scenario

Source: Preqin and FRG
For illustrative purposes only.

Using Preqin's Pandemic Scenario, the data shows that a downturn could have a significant positive impact on the performance of recent vintages. The Pandemic Scenario assumes a severe economic contraction of 20% in Q2 2020 real GDP, followed by a swift recovery in the remaining quarters of the year.

Sixty-two percent of buyout dry powder – valued at $815bn – is currently held in funds of vintages 2018-2019. As such, GPs managing these funds will have a substantial amount of financial firepower to put to work as asset prices fall.

At the same time, Preqin found that 76% of buyout unrealized value – valued at $1.22tn – sits in funds of vintages 2012-2017. GPs managing funds of earlier vintages may be faced with a challenging economic environment for their portfolio companies, as well as a more difficult market for exits.

While funds of vintages 2018-2019 generate a greater variation in returns compared to to Preqin's Baseline Scenario, a recession could mean an upward shift in median expected returns as dry powder is deployed at better prices.

Preqin's model indicates that in a recession scenario, funds of 2018 and 2019 vintages – viewed as the vintages most likely to underperform before the pandemic – are now more likely to outperform.

Alternative Investments Have Doubled their Share of global Investible Markets⁴

According to CAIA, trends are showing increasing portfolio diversification as investors move from domestic to global portfolios and allocate from traditional investments towards alternative investments.

Fifteen years ago, alternative investments comprised 6% of the $4.8 trillion global investible market. Today, the global market totals $102.6 trillion, while alternative investments have grown to $13.4 trillion or 12% of the global investable market, with retail investors averaging allocations of 5% and institutional investors having substantially higher allocations.

Percentage of Global Investible Market

Global Investible Market (in $Trillions)

Projected Directional Change Over the Next 5 Years