For investors in private debt, there are clearly more pressing concerns than committing fresh capital to funds. Our preliminary fundraising figures for the first quarter of this year show that less than $21 billion was raised globally by 24 funds in the three-month period. This was not all down to the coronavirus pandemic, which doesn’t appear to have begun spreading outside China until February, but – once it did – any prospect of fresh momentum after a subdued start to the year was dashed.
So, if not backing funds, what are investors’ top priorities? Here are some of them, according to market sources:
1. Unsurprisingly, there is very close scrutiny of existing portfolios. This applies to all funds but is particularly true of those that are largely invested and/or into the harvesting period. Do fundamental assumptions about the performance of these funds need to be reassessed?
2. Forecast cashflow models are being revisited in the expectation of lower realisations and of some funds – especially distressed and special situations funds – being likely to draw down more quickly than expected in the second half of this year.
3. The ‘denominator effect’ is being watched carefully for its impact on asset allocations following the hit taken by public markets. Part of this calculation is whether to try to rebalance allocations now or wait for an expected lag effect whereby private market valuations eventually catch up with public markets.
4. The re-underwriting of planned future commitments to fund managers to make sure they remain the best opportunities in a fast-changing environment.
5. Credit stress is being modelled on “worse than GFC” assumptions for defaults and losses. Whatever government support arrives for portfolio companies, the likelihood is there will still be many businesses that cannot be rescued either by government or their private equity owners.
We would like to wish readers of Private Debt Investor very happy holidays, even if they are having to be spent at home. If you’re looking for something to do, you could do a lot worse than browse the archive here of all our recent coronavirus-related coverage.
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