Interview of Olivier Carcy, Global Head of Asset Management, and Brenda Lau, Head of Private Equity - Asia branches in Swiss magazine Sphere.
If the Global Financial Crisis (“GFC”) was a disaster to the financial sector, the COVID-19 pandemic is a catastrophe to the businesses and economies worldwide. How can private equity play a role in today’s predicament?
Private equity has gained huge importance and influence since 2000. In the U.S., the number of listed companies decreased significantly in the past decade; while the number of private equity-backed companies more than doubled. The public markets in the Western world continue to shrink as private markets alone often are able to provide adequate capital to finance businesses to grow and mature. The trend is starting to emerge in Asia also. In addition, the private markets AUM has grown from approximately $1 trillion in 2000 to over $7 trillion in 2019, and shows no sign of abating. Analysts expect the industry’s AUM will reach $17 trillion by 2023. As investors pour money into this asset class, private equity is no longer a niche but a mainstream strategy.
The COVID crisis is unprecedented and may have a long-lasting effect, and presents a new form of challenge to all aspects of businesses such as supply chain, production capacity, operation, cash flow management and business model, especially when countries implemented various degrees of confinement and social distancing measures. Going forward, businesses will need to transform and adjust, industries and sectors will revolutionise, and consumer behavior and habit will change.
The current COVID crisis, of course, also presents challenges to the investment and divestment activities. Investing in private companies is not an easy task. It requires ample resources and local expertise to perform due diligence on the target being acquired. It also involves multiple discussions with various parties such as consultants, lawyers and bankers to structure a deal. With lockdowns and travel restrictions, the number of transactions will inevitably decrease and investment activities unlikely to resume before 2021. Divestment activities have already slowed, as valuations have suddenly dropped, and companies shifted their focus on fixing business disruptions. It is expected that normalcy will only return in 12-18 months.
In the past five years when the market was robust, private equity generated ample liquidity by exiting portfolio companies via trade sale, secondary sale or the IPO market. As valuation is suppressed as a result of the uncertainty brought by the surge of infected cases and timing of vaccine available, private equity managers tend to hold on to the portfolio companies longer. In the coming two to three years, investment activities, albeit slower than the past, will outpace exits, resulting in net capital outflows for investors.
Today, private equity is sitting on $2.7 trillion of dry powder, a tenfold increase from two decades ago. The vast amount of unspent capital can help provide solutions to companies under stress, and carefully capture opportunities as they arise. Further, the private debt market, which has seen a rapid growth, has provided an alternative source of capital for LBOs and business transformation. Last but not least, the secondary market has matured and become more sophisticated. This provides liquidity to both private equity managers and investors who need to restructure or offload portfolios.
Private equity has demonstrated its resilience, generating positive and mostly double-digit returns over different cycles.
The impact of COVID will persist for some time. In light of the challenges ahead, private equity will continue to adapt and evolve. The “entrepreneurial spirit”, and the resilient and flexible nature will help the industry survive and thrive.
Indosuez Wealth Management has 20 years of experience in private equity investment. 25 employees in 7 offices, including 2 in Asia, manage over 5 trillion US dollars in investments.
September 21, 2020