If you watched public markets plunging in mid-March and were immediately transported back to 2008, you were not alone.
By 19 March, the S&P 500 was down more than 32 percent from its 19 February high, with trading halted several times as a drop of more than 7 percent triggered an automatic 15-minute shut-off. Over in London, the FTSE 100 hit a nine-year low with the pound tumbling to a 35-year low. Talk in private markets turned to the denominator effect.
But this crisis is fundamentally different to the 2008 market crash, as Hamilton Lane chief executive Mario Giannini recently explained in an in-depth podcast interview with Private Equity International.
“In 2008, the epicentre of the problem was the financial system,” he said. “What you realise in this is there’s a pandemic going on, a health issue, and a government response to that, that is driving the financial markets. We are sort of the corollary damage to what was going on everywhere else.”
Reacting as though the market was back in 2008 turned out to be “a little bit of a head fake”.
“Everybody looked at it and went, ‘Okay, I know what’s going to happen: we’re all going to rush into distressed debt, we’re going to make a lot of money in distressed debt, and then credit’s going to be the place to be, and then [it will be] equity six or nine months later,’” he said.
What this doesn’t take into account is the speed of the reaction from central banks and governments. In just a couple of months, government fiscal stimulus programmes achieved “five or 10 times” what they did in the two years following the 2008 market crash.
PODCAST: In depth with Hamilton Lane’s Mario Giannini
Hamilton Lane’s long-time CEO explains the role he thinks private markets can play in the post-coronavirus rebuild, and why we shouldn’t worry about the public markets rally.
This had several effects on private markets: firstly, on the distressed credit side, it “basically took that entire opportunity away in very large part”, and made the equity opportunity to buy or sell companies come back much faster.
In prior downturns, fund managers were punished or rewarded for “doing things smart financially”, such as using leverage well and having strong management teams. This time around, it’s been “a pure chance situation”.
“You now have a completely, I think, bifurcated world out there,” Giannini said, adding that those invested in tech companies such as Zoom are doing very well, while those in industries such as aviation or hospitality are in trouble.
“There’s a class of companies that are doing really well and a class of companies that are really struggling.”
Investors face two paths
For investors, this has created two opposing investment paths: “You’ve got to make a choice – am I going to be investing with companies that are still at very high multiples, basically pre-pandemic, and go with growth, or am I going to go with value?”
Rather than the sequencing being credit followed by equity, “now it is equity and perhaps, if the markets struggle over the next year, economies struggle, credit comes in a much more elongated cycle.”
Giannini observed that the LP community is the part of the market that learned the most from the Global Financial Crisis.
“[During the GFC] we were getting calls, ‘Get me out of private equity, get me out of illiquids,’” he said. This time around, that did not happen, even at the depths of the market rout in March.
“People were not panicking,” he said. “They were worried, sure – the markets were down 30 percent. But there was a notion of, ‘Oh, I know how this works – the markets go down, illiquids do somewhat better – so I’m not going to panic. I may not invest more, but I’m not going to run for the exits.’”
How individual LPs are choosing to position their portfolios right now depends, in large part, on what they already have. Those with, for example, significant exposure to energy will have damaged portfolios, while those predominantly exposed to technology or healthcare will be doing reasonably well. From that position, LPs can assess how much risk they’re willing to take, and therefore where they want to lean going forwards.
“I don’t think geographically there’s any place that you say is so much better than one place over another, and so it’s more a question of, ‘are you are you going to lean a little more equity, are you going to lean a little more debt because you think that in fact, over the next year, things will still continue to struggle.’ Those are the conversations you have around portfolios today.”
Listen to the full interview with Mario Giannini here.