While private asset valuations have not been marked to market, suggesting “status quo,” PE fund managers and underlying companies have been very busy during the past several weeks. From an underlying private company perspective, the most important near-term priority is liquidity, as companies have drawn down available revolving lines of credit to shore up their balance sheets and provide an important financial buffer in anticipation of a prolonged period of economic weakness. Interestingly, investors (limited partners, or “LP”) have seen an increase in capital calls at the fund (general partner, or “GP”) level, leading some to wonder whether funds were finding opportunities for investment amid the volatility. In fact, it appears that many GPs are calling capital to pay down existing lines of credit that were drawn up to a year or more ago in order to fund prior deals.
The decision at the fund level to draw on credit vs. a capital call is important given that credit has been readily available and relatively cheap – hence, it had been preferred in some cases to calling commitments from LPs. Ultimately, this decision can have a meaningful (and positive) impact on internal rate of return (“IRR”), the performance metric used to assess a fund manager’s acumen. Last, while there are some obvious areas of challenge in the private markets, like brick and mortar retail, energy and travel, there are also areas of tremendous opportunity, like technology (think Zoom, Slack) and biotechnology. Lessons from the last crisis suggest that these periods of steep distress are rare and typically provide good long-term opportunities.