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Private Equity Managers Dramatically Reverse Return Predictions

Over the next two years, the outlook isn’t good.

Pre-pandemic, nine-out-of-ten private equity managers predicted rising returns over the next two years. Now, 68 percent expect to underperform 2019 results, according to Investec polling.  

The buyer’s market for private companies does have private equity managers foreseeing muscular returns on deals struck this year. Not that firms will be selling many portfolio companies: half of respondents expect zero investment exits in 2020. 

“The unprecedented dislocation from Covid-19 will put pressure on PE returns and recalibrate the future assessment of general partner performance, both on an absolute and relative basis,” Investec’s private equity client head Christian Hess said in a statement. “But the strength of the PE industry model is that it can buy well in a down market and sell well in an up market. The overall market and valuation reset will create long-awaited deployment opportunities for the agile GP.”

Investec’s corporate and investment banking arm surveyed about 400 private equity professionals, primarily in the U.K. and Europe, between February 4 and April 24, a part of its annual trends survey. The U.K. firm opted to publish some results Monday, ahead of the comprehensive June report, given that it had captured a timely mid-crisis snapshot.

More than half of those surveyed believe that the outbreak’s economic fallout will exceed that of the 2008-2009 financial crisis

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Private equity managers in the U.K. responded to crashing markets and locked-down economies by vacuuming up as much money as they could. Almost three-quarters (71 percent) reported that they’ve already exhausted all available portfolio financing. 

North American managers showed greater restraint — or superior liquidity — with 25 percent tapping out their credit lines, and another 16 percent planning to do so by the end of September. 

This debt thirst is understandable, said Callum Bell, Investec’s head of growth and leveraged finance — and it’s not simply concentrated among shattered industries such as restaurants and travel. “Whilst certain sectors are feeling the pressure more keenly than others, portfolio companies are acting quickly to draw down on financing arrangements, regardless of the markets they serve,” Bell said in a statement. “We expect many to require further capital, later in 2020.”   

For Investec, the calls are already coming in, according to Tom Glover, head of North America fund finance. 

“We’ve seen a particular spike in GPs contacting us about portfolio-based lending facilities, as they delay exits and focus on sustaining and creating value later into their funds’ lifecycles,” he said in a statement.

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