Industry News
March 11, 2020

The strength of PE during economic downturns

Nicolas Cole

There is no doubt that these are unusual times. Global financial markets have experienced increased volatility, and increasing uncertainty regarding the medium and long-term economic effects.

While it is too early to say with certainty what the long-term effects of the current volatility will be, we believe it is worth emphasizing the following points.

During a broad market sell-off, a diversified asset class mix can help reduce volatility. The market is currently experiencing unprecedented levels on a number of indicators, but fundamentals remain supportive.

Figure 1: Private Equity Has Historically Outperformed During Economic Downturns

Note: There is no guarantee these trends will continue. Please see the “Important Information” slide for more information about the comparison to indexes.
Source: Cambridge Associates, Private Equity Index as of Q3 2018.

Diversity Leads to Strength

Irrespective of the business cycle, it is also worth noting that in a downturn, PE tends to perform better than public markets. According to Cambridge Associates, Private Equity returns outperformed public markets during downturns in the late 1990s and early 2000s.

JPMorgan Asset Management estimates that in the 15 year period through the end of 2017, Private Equity generated a 14.4% net annual return vs. 8.8% for the MSCI World equity index.

Access to Capital

One reason for this relative resilience is that private equity-managed companies continue to have better access to capital during downturns than their non-private equity managed counterparts.

As competitors experience tightening capital markets and are forced to cut costs and decrease investment, private equity companies are able to continue to invest. This flexibility allows them to re-accelerate faster once markets stabilize, potentially better positioned relative to their competitors than before the downturn.

Timing the Market

As we – and many others – have written before, the best investment strategy typically includes a strong dose of ‘stay the course,’ even if the broader markets are experiencing increased volatility.

Hamilton Lane write that “the innate, human inclination to pull back at the sight of danger and ‘wait it out for the right time’ will only result in lower returns”.

The key here, especially when considering a private equity investment, is selecting the right fund manager. Top-quartile fund managers – as the chart above makes clear – are key to realizing premium returns.

Top-quartile managers demonstrate excellence in selecting market leaders in key industries. Working closely with firms’ management, they develop long-term strategies that can help future-proof their firms. And they provide steady access to capital that allows firms – through investment, acquisitions, or otherwise – to gain an advantage relative to their competitors.

At Moonfare, our mission is to connect private individuals with the world’s best private equity managers. With strong governance models and a long-term vision, we believe that investing with these managers can be a key part of achieving a diversified asset class.

Source: Moonfare, Hamilton Lane, Forbes & Carlyle Group

Nicolas Cole

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