PE NAVs will hold up in downturn – report

GPs' abilities to react faster and PE funds’ strong governance framework are key reasons for the stability of the asset class during market volatility, according to eFront.

Private equity firms facing a drop in the value of investments due to the covid-19 market rout can rest easier as such portfolios will hold up against public equities in the long run, a study has found.

Research from data provider eFront show the net asset values of buyout funds have been stable in the last financial crisis and expect the same resilience and recovery following the covid-19 pandemic. A key reason behind the stability of buyout funds’ NAVs is that PE firms can react quickly to adjust their portfolios in the event of a downturn.

“Fund managers tend to react faster, thanks to advanced and early key performance indicators, but also strong governance frameworks,” according to the report. Managers are also better equipped to support their portfolio companies in a downturn through re-investments.

In late April, Blackstone, Carlyle Group and Apollo Global Management reported a decline in the value of their private equity investments. Both Apollo’s and Blackstone’s PE funds dropped 21.6 percent in the first quarter while Carlyle PE fund’s declined by 8 percent, according to their latest earnings reports.

The eFront report noted banks are not part of the usual investment universe of buyout funds while public equity investments tend to include banks, adding to stability of private portfolios. Buyout investments also take time to sell and tend to underreact to events and downturns.

eFront’s study analysed 20 years of capital calls, distributions and performance of 552 US and 317 European buyout funds to find out the likely impact of the pandemic on the asset class.

According to the report, PE firms’ buy and sell structure is an advantage during times of market volatility.

“Fund managers can snap up good investment opportunities in difficult times, at attractive valuations. As a consequence, this can prop up NAVs during that quarter and the following quarters,” eFront noted.

Looking at the NAVs of PE funds during the global financial crisis, the report revealed that each vintage year affected by the past crisis has recovered from its dip in NAV and recorded at least a multiple of 1.5x.

The study found that 2001-vintage funds were hit when selling off their portfolios. NAVs for 2002 also suffered but the effect was much more limited and was fully recovered by 2010. NAVs of 2003-vintage funds dropped right at the end of their investment period and recovered and did not seem to have had any meaningful impact on overall performance.

NAVS of funds in vintage years 2005 and 2007 suffered the most; 2005 was hardest hit as funds of that vintage made investments which rapidly gained value, then lost their gains with recovery taking time. For 2007 vintages, these suffered at the beginning of their investment periods and recovered in 2010, the report noted.

Although each crisis is unique, the NAVs of funds will to some extent mirror the gyration of stock prices, just not the full swings, eFront concluded.

Assuming the worst of the pandemic crisis will be in 2020, PE funds raised in 2016, 2017, and 2018 will likely suffer the most, the report noted.

Apollo’s $24.7 billion Fund IX, which has shifted its focus almost entirely to distressed-for-control transactions as a result of the health crisis, Carlyle’s $18.5 billion Fund VII and CVC Capital Partners’ €16 billion Fund VII are the three largest funds in 2016-18, according to PEI data.