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Private Equity Investments Withstand COVID-19 Slowdown

Survey finds pandemic has had little effect on capital structure of private equity funds.
By Michael Katz


The economic turmoil in capital markets sparked by the COVID-19 pandemic has had little effect on the capital structures of private equity funds, according to a recent survey published by Willis Towers Watson.

“Private equity-owned companies have a number of structural advantages that may have allowed them to navigate this crisis,” said Jon Pliner, Willis Towers Watson’s US head of delegated portfolio management. “In addition to the expertise provided by private equity managers, the additional access to equity and debt capital from their sponsors may also have provided some respite.”

The survey, which took place in April and covered 36 private equity funds representing 300-plus portfolio companies, was intended to find out how businesses were coping with the pandemic and to set expectations for the coming months.

The results of the survey indicate that, despite a subdued environment for exit deals during the first half of 2020, there has been little evidence of forced exits by private equity firms into a depressed market.

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“Managers have been able to maintain significant flexibility over both the timing and the terms of company exits,” Pliner said. “Beyond the short-term dislocation, we also see several opportunities where we can continue to deploy capital, notably in technology, health care, and consumer staples.” He added that “with deal volumes depressed, there appears to be far less competition for opportunities and, as a result, potentially better entry pricing.”

According to the survey, 87% of respondents said their holdings were unlikely to breach covenants as a result of the pandemic, while only 13% said their holdings were either close to breaching or likely to breach covenants in the next two to three months.

However, the responses were more varied regarding customer demand for products or services, with 46% of respondents saying their holdings were experiencing a medium-to-high impact from the slowdown in global economies, mostly within the consumer discretionary, industrials, energy, and materials sectors. Meanwhile, sentiment among commercial services firms was strong, and 20% of consumer staples firms reported a positive impact on demand.

The impact on businesses’ supply chains and their own internal operations also remained small, with approximately 80% of respondents showing low levels of concern, indicating most private equity-held businesses effectively implemented alternative working arrangements to avoid disruptions from the COVID-19 crisis.

Private equity-owned companies “have access to high-quality expertise from managers, access to equity and debt capital from their sponsors, and active owners that are well aligned to business success,” said Willis Towers Watson in a report analyzing the survey’s findings. “Whilst the impact of the COVID-19 pandemic on global economies is still evolving, firms and companies have the right tools to tackle issues that arise.”

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Home > News > Market Moves > Tail Risk Hedges Are Vital for Investors Now, Argues Black Swan Theory Guy
Market Moves

Tail Risk Hedges Are Vital for Investors Now, Argues Black Swan Theory Guy

Things are so unpredictable that buffering yourself against unknown surprises only makes sense, says Nassim Nicholas Taleb.
By Larry Light


The man who hatched the Black Swan theory has advice for investors: Get yourself a tail risk hedge, pronto. “If you don’t have a tail hedge,” said Nassim Nicholas Taleb, “I suggest not being in the market—we’re facing a huge amount of uncertainty.”

The Black Swan theory holds that unlikely events—like, say, a pandemic upending the world economy—can and do appear from nowhere, and they happen more often than you’d think. In his 2007 book, The Black Swan, the former academic and derivatives trader argued that standard statistical models for markets are deficient, in that they are not attuned to detecting rare events. The 2008 financial crisis made him look like a prophet.

The term “black swan” refers to the fact that swans are always, well, white. So when a black one comes along, it is a rare occurrence.

Tail risk is the probability that an event on the narrow end of a bell curve of outcomes has a greater chance of coming true that standard-thinking investors feel comfortable with. In simple form, a tail risk hedge would be to protect long positions on the S&P 500 with derivatives that track the CBOE Volatility Index, or VIX, which is inversely correlated to the broad market benchmark.

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Taleb, appearing on CNBC, pointed to what he considered the wackiness of the market’s rise, even as COVID-19 infections and deaths increase—which may well lead to more economic pain, in addition to human tragedy. He cast doubt that there will be a V-shaped recovery.

Washington may be working to forestall any further economic harm, he said, but for naught. “We are printing money like there’s no tomorrow,” he said, alluding to the Federal Reserve’s multi-trillion-dollar campaign to blunt the recession’s most dire effects.

The fear over the coronavirus will continue to haunt the market and the economy, he predicted, long into the future. “COVID seems to be there even if the pandemic dies down,” he said, and that means spooked consumers won’t be in a hurry to spend again and buoy the economy. “You will still have people cautious enough that it will impact a lot of industries,” he said.

Indeed, hedge funds that are designed to benefit from tail risks have enjoyed a remarkable run-up in the age of COVID-19.

For example, the CBOE Eurekahedge Tail Risk Hedge Fund Index has jumped 50% this year. At the same time, the S&P 500 is down 2.6%. Universa, run by Mark Spitznagel, was up 4,000%. Taleb is an adviser to that fund.

On the other hand, the long-term record of these funds isn’t stellar, because market turbulence like today’s doesn’t occur as often as bull runs. Last year, the Eurekahedge fund lost 10% while the S&P 500 earned 34%.

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