A recent article in Barron’s explains how private equity investing continues to be a popular strategy among institutions and high net worth individuals — and its appeal is proving resilient even during the first quarter of 2020 with the onset of Covid-19.
In the first three months of 2020, private market funds experienced losses but not as much as public markets, continuing a pattern of outperformance, says UBS Global Wealth Management.
In the first quarter of 2020, private equity returns declined 10%. Meanwhile the Russel 2000, a small-cap index, showed declines around three times as severe. Furthermore, there was a 5% decline in private debt funds returns whereas S&P dropped 13%.
Healthcare and technology have stood out, especially resilient sectors.
According to Jay Won Lee, a private markets strategist at UBS, tech companies, especially software firms, have been resilient in the last months because Covid-19 and the stay-at-home economy has accelerated digital penetration, Lee said, and hence fund managers are keen to invest in the sector, even at high valuations.
Historically, funds with “crisis year” vintages — including all funds being raised in 2020 — earn the highest returns.
For instance, funds that formed in the following year after a market peak reported IRR of 18.6% compared with a return of 9.7% for the MSCI All Country World Index (ACWI) public market equivalent, according to a UBS analysis formed between 1994 and 2017.
One year before a market peak, this same set of private funds reported an IRR of 11.4% contrasting with a 5.4 % for the MSCI ACWI, UBS said.
According to the global consulting firm McKinsey & Co, at the end of 2019, assets in private market funds globally hit $6.5tn, a jump of 10% for 2019 alone and a 170% increase over the past 10 years. In contrast, assets in global public markets rose approximately about 100% in that period.