While the world economy hangs suspended, private equity is on the move. Recently, Institutional Investor hosted a webinar titled “Global Private Credit – Near-Term Strategic Implication,” where attendees were asked, as a result of the downturn, how they’re most likely to capitalize on dislocations in private debt: 64% said increasing allocation, followed by 27% who said maintaining current allocation, 7% who said decreasing allocation, and 2% who said their organization does not invest in private debt.” It’s all up in the air, and it’s all fair play.
Here are a few other trends that have emerged from the pandemic.
Client conviction
When asked whether their organization was putting commitments to GPs on hold, 60% of the respondents said, “No, business as usual,” compared to 20% who said, “Proceeding with opportunities in process but not adding to pipeline,” 12% who said, “Proceeding with re-ups but no commitments, and 8% who said, “Yes, on hold.” In fact, in the past two months, managers have doubled down on their commitment to their clients, including expanding their knowledge of each borrower’s firm, including supply chains, operations, employees’ ability to work remotely, revenue forecasts and liquidity.
Due (diligence) process
In the event of a new business relationship, private credit managers are taking this time to create new vetting processes. In addition to onsite due diligence, quality of earnings and industry studies, the pandemic has ushered in new suite of touchpoints, including embracing Zoom calls and working with technology to utilize more sharing of information and more data gathering to recreate the onsite feel. One upside to the virtual process is the acknowledgement that both the manager and client are in different regions, a default symptom of the pandemic, which may extend to greater post-pandemic consideration of managers located in a region separate from the client.
Covid-19 impact
When asked about their biggest concern regarding global credit markets as they are impacted by the Covid-19 crisis, 85% said, “Increasing defaults,” followed by 12% who said, “Lack of liquidity,” 3% who said, “Unfavorable credit spreads (on a risk-adjusted basis), and 0% who said, “Falling prices.” In the context of needing short-term strategy to manage liquidity and extend duration, private credit managers are also training their focus on industries likely to come through in the downturn. Although this may vary by region (a densely populated region like New York City will be hit harder than a city in Texas), what’s out for the count are the frontlines of consumer-facing business, including cars, airlines, hotels, leisure, oil and gas, minerals, mining, energy, hotels and restaurants.
Recovery: It may not look like a “V” shape
As revenue in some industries has gone to zero and the economic landscape could get worse, the prospect of a V-shaped recovery seems less and less likely. Considering that the pandemic is still new to the market and the duration is unknown, a lot of the data being used is imperfect; however, on the flip side, as cities re-open, the accumulation of data can only make the picture fuller.