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Unfortunate timing: Some PE fund vintages will be hit much harder by COVID-19


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Unfortunate timing: Some PE fund vintages will be hit much harder by COVID-19

Of all live private equity funds, 2016 to 2018 vintages and those that began investing seven to 10 years ago could be the greatest casualties of the coronavirus crisis in performance terms, according to market sources.

The first group may incur deep net asset value reductions this year, assuming the worst of the economic crisis occurs in 2020, according to recent analysis of European leveraged buyout funds conducted by alternative assets software provider eFront SA.

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"Almost certainly, you'll be making a loss because you bought [portfolio companies] at the top of the market at very expensive multiples and very punchy prices, and private equity's all about buy low and sell high, right?" Placement agent and secondaries market adviser Cebile Capital LLP's Sunaina Sinha Haldea said of these vintages.

While it is hard to say what returns will be like for specific vintages, managers of 2016 to 2018 vintage funds do have a long time to work with their portfolio companies, and look for exit opportunities, Michael Johnson, group head of fund services at administrator Crestbridge said. "You have to be patient and you have to remain committed," he said.

The same cannot be said for funds that closed seven to 10 years ago, which are now seeking exits, Johnson said. "It's not a good time to necessarily exit investments. That would be COVID negative."

It is unclear what the recovery from this crisis will look like, but there's consensus there will not be a quick V-shaped snapback, Sinha Haldea said. "The price at exit has to be higher than the price at entry, but how is that going to happen?"

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Time is money

Parallels between 2016-2018 and 2005-2007 vintage vehicles, which were affected by the global financial crisis, may emerge, but general partners have more options now than they did following the previous crisis, which could be beneficial.

COVID-19 is "the great accelerator" for strategies including once-maligned GP-led restructurings, which Johnson expects will increase and said is "a good thing." These restructurings provide the required liquidity at the end of a fund's life and allow GPs to remain focused on a fund's performance.

"Almost all" 2016 to 2018 vintage funds are going to require a GP-led restructuring, to allow the manager more time to exit its investments, Sinha Haldea said. While there are going to be weaker vintages, it may be possible for GPs to improve returns. "The use of what's known as continuation vehicle structures to help buy duration, buy new time and/or follow-on capital is going to become very, very common for those vintage funds," she said.

And unlike during the global financial crisis, firms and their funds have avoided a liquidity squeeze, with portfolio companies as well as funds still able to access capital. There is plenty of liquidity in the system thanks to fiscal stimulus from the government, monetary policy and Fed stimulus, Sinha Haldea said. "It's a question of just accessing it in the right way."

Limited partners may also be sympathetic toward GPs who have portfolio companies in sectors that were badly affected by the pandemic and the lockdown measures introduced to contain it, such as travel, leisure and consumer retail, Sinha Haldea said. "Who could have predicted this?"

That said, they will still want a "big brave fight to save the vintage," and those who are seen to not have done enough "will be frowned upon by the investors who may not come back," she added.

Not set in stone

Data also points to a possible upside. eFront's analysis of European leveraged buyout funds found an anomaly vintage year in the lead up to the financial crisis — 2006 — whose funds progressed on total value to paid-in multiple across their lifecycles, while 2005 and 2007 vintages plateaued.

"[The 2006] vintage invested in the same conditions as 2007 but did not experience the same plateau of multiple increase," the report said. This may be because the pool of funds captured in 2006 is particularly good, compared to 2005 and 2007. Potential dips from 2016 to 2018 vintages are "far from being written in stone," and the quality of fund managers, their actions, and the depth and extent of the recession will all play into performance factors, the report said.

All vintage years affected by the financial crisis have recovered from its dip in NAV in stressed times and recorded on aggregate a positive multiple, above 1.5x net, the report said. "The universal lesson, which also holds true for investors on the listed markets, is, therefore: do not panic."