Covid-19 is not just a health disaster but it has had an unprecedented impact on the global economy, and investments. The pandemic-affected have long outnumbered the pandemic-infected.
In the investing domain, Covid-19 has had a sizeable impact on the business operations of both alternative assets’ fund managers as well as its investors. London-headquartered Preqin, a provider of data on investments in alternative assets, highlights that the disruption caused by travel restrictions and social distancing will lead to dampened activity through the remainder of 2020, and possibly into 2021.
However, Preqin says that alternatives funds have proven to be resilient in previous cycles; and, in the long-term, investors seem set to increase their allocations as a result of the pandemic, accelerating future assets under management (AUM) growth.
According to Mark O’Hare, Preqin’s chief executive, a dispassionate analysis based on the previous financial crises suggests three major outcomes for alternative assets. “A significant short-term slowdown in activity; a medium-term resumption of the established growth trend; and a long-term outperformance of those funds which were able to capitalize on advantages being presented now,” he says.
According to O’Hare it’s unlikely that Covid-19, which has claimed more than 300,000 lives so far, will fundamentally alter investors’ attitudes to alternatives. However, “it may well accelerate some long-term trends and moderate others,” he adds.
Preqin has been surveying and interviewing fund managers and investors across the industry, looking at 2020’s activity so far, and drawing comparisons with previous financial cycles. In April, Preqin surveyed nearly 300 limited partners (LPs) and general partners (GPs) to gauge the current situation, their adaptation, and also their future allocations and commitments.
Given the fact that the alternatives industry is not a single entity, the pandemic effects are likely to be felt to different degrees and in different ways across each asset class.
The private equity (PE) space, for instance, is witnessing accelerated digital transformation. PE firms have almost $1.48 trillion in dry powder—handy cash for fresh or add-on investments of which $314 billion is stashed with venture capital (VC) funds—to deploy into deal opportunities, and are well-placed to take advantage of opportunities presented by a downturn. However, as per Preqin, in the short-term the reality of social distancing will hamper deal closing.
About sectors for PE, Preqin believes that retail, leisure, and hospitality assets are set to be hit hard, although supermarket retail specifically will benefit. “Digital technologies will benefit, particularly in non-cyclical sectors like health-tech and remote working – accelerating interest in already-growing areas,” Preqin says.
In the case of private debt which has dry powder worth $292 billion, Preqin believes that the financial crisis of 2008 was the making of the modern private debt industry, putting the spotlight on distressed debt funds and spawning the direct lending sector.
Preqin points out that 2020 will see if the asset class can repeat that feat as interest in distressed debt has spiked in Q1; and more than a third of investors are now targeting the strategy. “Direct lending, meanwhile, is untested in the face of a crisis, and Covid-19 may put a stumbling block in the path of the sector’s expansion,” warns Preqin.
Amidst the Covid-19 crisis, real estate, with dry powder worth $344 billion, could offer smart logistical opportunities to alternative investors of the asset class. Preqin flags that rental income from businesses and private housing has seen a sharp drop since the start of March, impacting the short-term cash flow of real estate fund managers.
Meanwhile, deal activity is expected to be particularly depressed through the rest of 2020, given the practical challenges in evaluating properties. And, in the longer term, Covid-19 will exacerbate the challenges already faced in the retail sector and may deflate the market for city-center offices. “Demand for logistics assets, though, is likely to spike – last-mile delivery has emerged as a particular opportunity for expansion,” Preqin highlights.
In terms of real assets, Preqin points out that toll-based and travel-related assets have been hit hard by travel restrictions, and the impact will burgeon up the longer the restrictions are in place. Also, the government-backed bailouts in the travel and shipping sectors in some parts of the world are currently aimed at operators rather than asset-owners, making re-compensation pretty uncertain.
“Conversely, social and digital infrastructure have significant growth opportunities as demand for healthcare infrastructure and broadband networks rises,” says Preqin. It adds that oil price volatility continues to disrupt the natural resources industry, and more than a quarter of investors are avoiding conventional energy investments in 2020 as a result.
On hedge funds, Preqin says that the while the first quarter of 2020 wiped out last year’s gains, the asset class did act to protect investors from worse downturns in equity markets, showing their value as a defensive strategy. “This may reverse recent negative sentiment from investors as the downturn extends,” Preqin adds. “However, it will also likely lead to a flight to safety, benefiting large managers and prompting more consolidation in the sector.”
The data provider also foresees decline in new hedge fund launches as new managers are deterred from raising vehicles to seek investment. “Strategy-wise, equities funds are more likely to see outflows, while macro and multi-strategy funds could benefit on the basis of their defensive credentials,” says Preqin.
Overall, it foresees fund commitments to be slow in 2020, owing to the difficulty of completing assessment and due diligence without face-to-face meetings. However, LPs are bullish about their medium-to-long term plans, with a continued trend toward higher allocations.
LPs and GPs alike, are confident that alternative assets will adapt to Covid-19 and will emerge stronger from it. Clearly, while Covid-19 happens to dent major short-term impact on the alternative assets’ investment space, the stakeholders are thinking long-term and continue to invest.
