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Alternative Market Briefing

Coronavirus Pandemic to cut down private equity's long-term return multiples by 10%

Friday, April 03, 2020

Laxman Pai, Opalesque Asia:

Private equity funds are expected to face a 10% hit to returns from Coronavirus Pandemic, revealed a study. Simulations for 2020 and 2021 also forecast liquidity stress in the industry, it said.

According to a new study by investment analytics company Cepres, the current shutdown will impact private equity, private real estate, private debt funds, infrastructure and direct investments.

Cepres announced they are advising clients to use 10% VaR (Value at Risk) forecasts for 2020 and 2021 due to the COVID-19 outbreak.

By studying previous crash scenarios and comparing to the impact of the current crisis, Cepres is now applying a 10% VaR liquidity forecast on their simulations for the 2020 and 2021 projections.

According to Cepres study, no net distributions for the next 6 months (until Q4 2020), and subsequent distributions reduced by up to 50% from Q4 2020 to Q4 2021 (depending on fund's maturity), it said.

The study said that a reduction of up to 50% in fund contributions compared to normal market expectations for the next 6 months. Although it is less likely many new investments will be made, existing investments may need increased liquidity because of the difficult economic environment. Funds may also call capital to build cash reserves to alleviate investor liquidity constraints in the next months.

Cash flow patterns will return to normal market conditions from Q4 2020 for contributions and Q4 2021 for distributions.

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