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LBO funds hit by economic fallout from Covid, says eFront

LBO funds recorded a significant fall in returns during the first half of this year, according to eFront’s latest Quarterly Private Equity Performance report.

LBO funds recorded a significant fall in returns during the first half of this year, according to eFront’s latest Quarterly Private Equity Performance report.

The coronavirus pandemic hit LBO returns sharply in the first half of 2020, as the economic effects of lockdowns and varying degrees of restrictions around the world started to be felt.

Figures from eFront’s new private equity report shows that the performance of active funds globally, measured by total value to paid-in fell from a near-record of 1.45x in late 2019, to 1.36x in Q1 2020, thereby returning private equity returns to 2014 levels.

The decrease then continued in the second quarter of 2020, although less sharply downward, as the impact of the Covid-19 pandemic on portfolio companies’ value and activity started to materialise. “To some extent, managers have included the evolution of listed stock prices in the fair value of investments,” said the report.

At the same time selection risk increased sharply, reflecting the turbulent market conditions during the onset of the Covid-19 crisis, and appears to have stabilised, the PE report showed.

Average time-to-liquidity rose slightly in the second quarter, following a drop in Q1, as managers adopted a “wait-and-see” approach and turned their focus to managing existing portfolio companies through the crisis, according to eFront.

This fall in performance has pushed a number of vintage years below the long-term trend line, with funds raised in 2013, 2015 and 2016 in particular now underperforming the average.

However, listed stock prices have recovered some lost ground in time, while net asset values have continued to go downhill, signalling adjustments due to the impact of the virus on portfolio companies’ operations. So far, the report stated, this is a “significant drop, but not a crash”.

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