Private markets retrenched as expected in the first half of 2020, while private credit continues to offer long-term stability.

The COVID-19 pandemic inflicted turmoil across the global private markets in the first half of 2020. Notably, private equity valuations, fundraising and deal activity declined. Below, we highlight some of the key effects of this volatility on private equity, credit, and real estate, with more extensive coverage available in the Q2 2020 edition of iCapital Network’s Alternative Investments Compendium.

Fundraising Slowdown

The pace of global private equity fundraising in the first half of (1H) 2020 offered a bifurcated picture. While the overall fundraising pace decelerated, most large and well-established general partners (GPs) that were somewhat familiar to investors did not see a meaningful slowdown. Smaller and/or emerging GPs (such as first-time funds), however, did see an impact – with many LPs pausing commitments to unfamiliar managers or those whom they not consider to be cycle-tested, particularly as they were still gauging their own comfort level in conducting due diligence virtually. Overall, $259 billion was raised by private equity funds in 1H 2020, which is likely to translate into a slower year than the steady fundraising pace of 2017-19.

In private credit, 1H 2020 also saw fundraising decline (with $56 billion raised globally). iCapital expects this trend to reverse in the second half of the year, driven by distressed debt funds. There is currently a vast amount of capital being raised for distressed debt-focused vehicles in light of the growing opportunity set driven by the pandemic’s impact on the global economy.

Global Private Equity Fundraising1

Global Private Debt Fundraising

1. Source: Preqin, as of June 30, 2020. Past performance is not indicative of future results. For illustrative purposes only.

Stalled Deal Activity

Private equity deal activity decelerated sharply in 1H 2020, as GPs moved their focus away from closing new deals and toward shoring up existing portfolios, making sure companies were adequately equipped (and had sufficient liquidity) to weather the first few months of the pandemic. Many fund managers also paused – and in some cases, even reneged on – closing new deals ahead of an expected lower-valuation environment, which would allow GPs to acquire new companies for attractive valuations compared with prior years.

Global real estate deal activity also plummeted to its lowest level in eight years, with the market experiencing a steeper drop than it did following the Global Financial Crisis. Activity is expected to remain subdued, with retail and hospitality unlikely to recover until COVID-19 is widely contained and there are indications of an economic recovery.

Global Private Equity Deal Activity2

Commercial* Private Equity Real Estate Investment Since 2008

2. Source: Preqin, as of June 30, 2020. Note: *Commercial is based on office, retail and industrial property types. Past performance is not indicative of future results. For illustrative purposes only.

Decline in Valuations

Private equity GPs have taken a characteristically conservative approach to valuing portfolio companies in light of COVID-19. Amid anachronistic soaring valuations for many public companies, private equity valuations – which have remained, on average, lower than public market valuations for nearly a decade – declined 8% in the first half of 2020. This is a topic we’ll cover in greater depth in an upcoming blog.

Long-term Benefits of Private Credit

Direct lending (typically senior secured private credit) continues to demonstrate its ability to generate long-term outperformance with less volatility than the leveraged loan and high yield markets. The asset class benefits from several traits that allow it to weather a crisis such as COVID-19 better than these markets. This includes fund managers’ ability to conduct in-depth diligence and implement stricter loan documentation, including covenants.

Global Fixed Income Performance

Sources: eVestment and Cliffwater Direct Lending Index as of March 31, 2020; standard deviation is quarterly. Cliffwater Direct Lending Index is a private market index. Future results are not guaranteed and loss of principal may occur.

See more COVID-19-related impacts on alternative investments, including private equity, private credit, hedge funds, and real estate in the Q2 2020 edition of the Alternative Investments Compendium.

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Kunal Shah

Kunal Shah

Kunal is Managing Director and Head of Private Equity Solutions at iCapital, focused on the identification, selection and due diligence of private equity funds to be offered on the Flagship Platform. Previously, Kunal was a Principal in the private markets group at Meketa Investment Group, a leading global investment consultant serving pensions funds, endowments and foundations, and family offices. He received a BS in Business Administration with a concentration in Finance from Drexel University. See Full Bio.

Tatiana Esipovich

Tatiana Esipovich

Tatiana Esipovich is a Vice President on the Research & Due Diligence team. Prior to joining iCapital in 2017, Tatiana worked at DB Private Equity (part of Deutsche Asset Management) in New York. Tatiana started her career at Deutsche Bank in London. She received an MA in Modern Languages from Oxford University.