Exit expectations for next year fall dramatically, says Investec

Coronavirus

A majority (83 per cent) of private equity GPs do not expect to make a portfolio exit within the next 12 months in the Covid-19 environment, a new report by Investec reveals.

The survey, covering private equity fund management execs' outlook since the first European and US lockdowns were implemented in March, also shows that a third of them have suspended marketing for their next fund or expect to do so.

Moreover, it shows the industry is entering a buyer’s market, with 73 per cent expecting returns from 2020 vintage deals to be at least as strong as the 2010 vintage.

The research, which compiled more than 400 responses from private equity professionals globally, will be released in full as part of Investec’s annual GP Trends survey.

More than half of respondents believe that the economic fallout of the Covid-19 epidemic will be worse than the 2008-9 financial crisis even as public markets have rebounded, according to the survey.

“The unprecedented dislocation from Covid-19 will put pressure on PE returns and recalibrate the future assessment of GP performance, both on an absolute and relative basis, but the strength of the PE industry model is that it can buy well in a down-market and sell well in an up-market,” said Christian Hess, private equity Client Group head at Investec.

He continued: “The overall market and valuation reset will create long-awaited deployment opportunities for the agile GP.”

One of the most immediate responses that private equity funds took in response to the crisis was to maximise the liquidity available to them, first at portfolio company level and now, increasingly, at the fund or GP level.

Half of those surveyed (50 per cent) have already drawn down on all forms of portfolio financing options, such as revolving credit lines. A further 16 per cent plan to do so by the end of September, they said in the survey.

A quarter (26 per cent) have already arranged additional portfolio financing, with an additional 41 per cent expecting to do so soon. Just under a third (29 per cent) have arranged financing at the GP or fund level or plan to do so in the short-term.

“In the current environment, there is, understandably, an increased appetite for borrowing, as firms seek to bolster liquidity levels and protect against the impacts on the Covid-19 pandemic," said Callum Bell, head of growth and leveraged finance at Investec.

“While certain sectors are feeling the pressure more keenly than others, portfolio companies are acting quickly to draw down on financing arrangements, regardless of the markets they serve. We expect many to require further capital, later in 2020,” added Bell.