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%.
Investing in technology and healthcare
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.
When to invest in private equity
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.