(16 September 2019) DAILY MARKET BRIEF 1:How did private markets fare during downturns?

(16 September 2019) DAILY MARKET BRIEF 1:How did private markets fare during downturns?

17 September 2019, 02:42
Jiming Huang

A recent survey conducted by Preqin showed that 74% of investors believe we are at the peak of the equity market cycle. However, 88% answered they will maintain or increase private equity investments in response to the equity cycle (Preqin Investor Update Alternative Assets 2H19).

According to CIO, there are three key takeaways from observing private equity during downturns:

Firstly, private equity returns can be cyclical and were typically lowest in the vintage years before equity market peaks. Nevertheless, returns generally improved into the crisis, with the strongest vintage performance achieved one year post crisis on average. Private equity vintage returns averaged 8.1% IRR in the two years before the 2000 and 2007 equity peaks. Returns improved both into, and after, the crisis to an 18.7% average IRR in the year following equity market peaks (Cambridge Associates data).

Second, private equity structures are well suited to navigate difficult times. Because of their more illiquid structure, managers are typically insulated from forced selling during downturns and often use dislocations to acquire assets. In addition, private equity (PE) backed companies were shown to be better positioned during and after the global financial crisis compared to their non-PE backed peers.

Thirdly, consistently allocating to private equity each year reduces vintage year risk which can expose investors to underperforming years or lead to missing out on strong ones. Adhering to a regular commitment program also provides a long term framework towards continuous private market exposure and removes the temptation to market time.

For more information read the latest CIO private market report answering topical questions on the private market industry, including a mixture of innovative quantitative research, an analysis of academic and industry papers, and engaging graphics to provide answers to pertinent private market questions.


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