Ladies and Gentlemen
As the markets are grappling with record levels of uncertainty and volatility, we would like to share with you how Castle’s investment adviser is monitoring existing investments and portfolios, as well as navigating what is likely to emerge as a new investment environment post COVID-19.
We are in a period of significant uncertainty, most readily observable in the public markets’ historic rapid decline and volatility in the last few weeks. The drop in global equity markets will negatively impact private equity valuations over the next quarters. While it will take time to see the full effects on private assets, we have already seen an immediate and drastic decline in deal activity and several exit processes have been put on hold. An impact on our net asset value can be expected to show with March valuations arriving in the next two months.
A number of sectors such as energy, travel, leisure have been hit particularly hard, with most companies taking substantial measures to salvage their businesses. Contagion to other sectors of the economy is already taking place and public market valuations are down across the board. Irrespective of sector, companies are focused on cash management and scenario planning, with even healthy assets selectively drawing on revolving credit facilities to increase liquidity. Private equity sponsors often benefit from both dry powder and reserves to ensure they can secure the health of their assets and sustain a potentially longer-term downturn, including preparing, where necessary, to inject equity or negotiate credit agreements.
While no two crises are alike, there are certain patterns one can recognize from previous market corrections. During the burst of the Dotcom bubble in the early 2000s and the global financial crisis (“GFC”) in 2008, equity markets were affected first, followed by liquid and illiquid credit, and only after several quarters were the full effects visible in illiquid assets like private equity. Corrections in the private markets were not only delayed, but were also more muted.
The crisis will be with us for months to come. In that time, we will continue to engage with our private equity managers to understand how the COVID-19 pandemic is affecting existing private equity portfolios and companies. We will report findings back to you in due course.
23 April 20, 7:59 PM