The COVID-19 pandemic represents the latest black swan event, and the U.S. is spending money quickly to provide support where needed. From a private markets perspective, the current economic crisis is really unlike any other. The unique factors include the globalization of finance and trade is much more prominent, the speed of information and data exchanged is heightened, the heart of this crisis is medical, not just economic, and we are in a very polarized political landscape which only adds to the stress.
The future will hinge on the length of the shutdown and its intensity, along with our preparedness to deal with second waves. We are just now starting to understand the cash flow implications and identify what is temporary versus permanent impairment. The transaction market has come to a halt and hinders our understanding what type of discount is being put on different asset types.
Institutional investors, individual investors and family offices are re-examining 2020 commitments and beyond. Many have had to make adjustments to the pacing and modeling of these commitments as valuations decline, cash flows tighten, and drawdowns will be extended into the future. Many investors are avoiding the private equity secondary market because of the lack of transparency and control as passive positions. But when it comes to the private real estate sector, most investors are staying the course, as the number one goal in this asset class is about the long-term play and illiquidity. Savvy real estate investors are not market timers.
In general, few deals are getting done, as fundraising has come to a halt. There is some uptick in marketing efforts from managers, but emerging and first-time funds in particular are having difficulty raising capital. Given the lack of information to mark down, and appraisals are backward looking, no one is being aggressive about marks. How do you buy in a market when you don’t have price discovery, and no one is marking down? It’s challenging, to say the least. The good news is the market is better positioned in this crisis than the financial crisis of 2008 due to increased liquidity.
So, what kind of activity is happening during this slowdown? Many are restructuring capital structures to get into equity, while others are looking to participate in CMBS dislocation tactically.
Investors need to remain vigilant, read the demographics and the real economy fundamentals but it is going to be a great time to take outsize bets because there will be real risk premiums, low basis opportunities due to rescue capital, and stress on borrowers, tenants and owners alike.