The real impact of the corona crisis on private equity valuations has yet to become visible, but it’s already time to look for new direct and co-investments. ‘Past experience has shown that post-crisis years are often good vintage years for new private equity investments,’ says Nils Rode (pictured), CIO of Schroder Adveq, in an interview with Investment Officer.
‘Of course it is important to be selective. But it is now possible to benefit from more favourable entry-level valuations,’ asserts the CIO of Schroders’ Swiss-based specialised private equity branch.
He bases his optimism, among other things, on the experience of previous crises. If you look at past crises, it turns out that post-crisis years are good vintage years. A vintage year in the private equity and venture capital industry refers to the year in which a fund started making investments or, more specifically, the date when the capital was placed with a particular company or project.
Base case scenario
However, this does not automatically mean that Adveq is already actively engaged in making new investments. Rode explains that in the short term there are still too many uncertainties. ‘Our base case scenario assumes that the lockdown measures will continue for several months. And that, at least in the second quarter, we will have to deal with a severe global recession, which may also have repercussions in the period thereafter.’
He also stresses that there can be big differences between countries when it comes to exit strategy and related economic recovery. ‘We must not forget that we have enormous challenges on two fronts. On the one hand, there’s public health and, on the other hand, there’s the economy. Only if there is a solution on both fronts will we really be able to return to normality.’
Also, the concrete impact of the crisis on existing investments has yet to become clear. After all, private equity is not valued on an ongoing basis. The most recent valuations are those of the fourth quarter of 2019. Valuations for the first quarter of 2020 are expected to become available in mid-May.
Private equity well-positioned
Rode expects the coronavirus to of course infect private equity as well, but he believes the asset class is relatively well-positioned. At the start of the year, for example, the record amount of dry powder in private equity funds was generally seen as a hindrance to generate good returns in the future. But these large amounts of locked-in capital suddenly looks like a gift from heaven, as this money can be used to support existing companies in the portfolio if needed, or can be used for new investments.
However, Rode argues that the impact for existing private equity investments will vary greatly by region and industry, the specific business model of a company and the financial situation. ‘In principle, all sectors will be affected by the virus. However, there are also certain companies that may benefit from the situation.’
As examples, Red mentions companies involved in research for medication and vaccines against the coronavirus, but also online gaming and online pharmacies. ‘These are companies that may initially experience increasing demand in the short term due to the crisis. But for online pharmacies this could just as well be a lasting development.’
Asia to lead the comeback
The market for new investments has come to a virtual standstill. There is still too much uncertainty which makes it difficult for companies to make business plans. For direct co-investment (single company), Rode expects this to pick up again within a few months.
It is difficult to say which region will be in the lead, but Rode expects that the question where the virus is brought under control the earliest will play a leading role in this. ‘From what we now know, China has taken the most determined action with very strict measures. The virus now seems to be under control here. With a slightly different approach, South Korea also seems to be successful in their approach to the virus. So it could be these two countries that will be the quickest to recover from the crisis. However, these countries will still face economic headwinds because they are export-oriented.
Schroder Adveq is specialised in private equity solutions for institutional investors. Its assets under management of $10 billion are managed through discretionary mandates as well as funds.
Read Adveq’s full market outlook here: Navigating the uncharted How can private equity investors respond to the COVID-19 crisis?