The rapidly evolving COVID-19 crisis is continuing to create severe political, social, and economic uncertainty that is translating into significant public market volatility worldwide. While the impact on alternative assets is less observable to-date, it is likely to be as significant as that for public markets.
As the full severity of the COVID-19 crisis is unknown at this time, the complete impact across alternative markets is difficult to conclusively assess, according to William T. Charlton, Jr., Ph.D., CFA, Global Head of Private Markets Data Analytics and Research at Mercer. The sections below discuss observations regarding the current situation as well as potential developments resulting from the crisis. Mercer is an affiliate of Guy Carpenter.
The U.S. Private Equity Market: Buyouts and growth equity are likely to show an impact sooner than other sectors due to their higher correlation to public markets. Companies and industries with recurring revenue models as opposed to transactional revenue models will likely fare better, at least in the short term. Small companies will be the most challenged to survive a sustained downturn. However, private equity firms are sitting on a record over USD 2 trillion of dry powder and are well equipped to deploy capital at more attractive valuations and manage existing portfolios, with many of them dusting off their Global Financial Crisis playbooks. Transaction volume will slow down, but that will not show up in the statistics for a quarter or more, however deals in process are still likely to generate capital calls in the near term. The quality of General Partners’ (GPs) operational value-add will be tested and more obvious. Also, GPs’ decisions of which deals to pursue and which management teams to back will play an increasingly significant role in investment outcomes.
The U.S. Venture Capital Market: Early-stage companies are typically less affected by market cycles. Moreover, some of the most significant venture-backed tech companies were established in economic downturns or shortly thereafter. Mid- to late-stage startups typically have higher burn rates and are still seeking profitable customers so consequently must be well-financed to endure. Growth stage businesses use little to no leverage and do not have the extra burden of creditors demanding repayment at a time when cash resources may be tight. From a sector perspective, consumer-related startups may experience the largest negative impact in the short term whereas enterprise software companies should fare better. Biotech funds are likely to see a delay in exits due to the stress the COVID-19 situation is placing on the healthcare system.