How Fund Managers Are Responding to COVID-19?

FUND Managers are polarized on the long-term impact, but business operations have taken a hit for most

Although fundraising is slowing in the wake of the economic fallout from COVID-19, most alternatives fund managers appear to be staying the course. Preqin surveyed more than 180 fund managers in April to understand the impact of the outbreak on their strategy and operations. Three-quarters do not plan to change their investment strategy for any active funds as a result of the outbreak. What’s more, a significant 90% of managers told us they do not plan to change their valuation method for portfolio companies, either.

(Source: Preqin Fund Manager Survey, April 2020)

Long-Term Impact Is Unclear

  • Why are fund managers not taking action amid the disruption? A viable reason could be that they remain unsure whether the market turmoil caused by COVID-19 will have a lasting impact. Indeed, 62% of surveyed fund managers believe their targeted returns will be unaffected, while 16% told us that targeted returns will be “slightly lowered” as a result of the virus.
  • We asked fund managers their views on the possible long-term impact. One manager said it depends on the duration of the virus: “If it will be over in a few months, companies could be able to recover a big part of the loss.” They also felt that “if it will last more than six months, many companies could face long-term issues.”
  • Altogether, it suggests that fund managers do not yet have enough clarity on the long-term impact of the virus on the alternative assets industry.

Business Operations Are Disrupted

  • Where fund managers are aligned is the effect of the virus on their business operations. Travel restrictions and social distancing measures have been implemented by governments around the world since the outbreak began. 69% of fund managers told us that their respective business operations have been negatively impacted as a result.
  • While our survey reveals that not all business activities have been affected, several key operations have been adversely impacted. The largest proportions of managers said that fundraising from potential investors (69%), operations at portfolio companies (61%), and deal origination (59%) have been negatively affected.
  • That said, a significant 74% of managers believe that business operations will return to their pre-COVID-19 state within 12 months. And only 3% believe the effect on operations will last beyond two years.

Our PEG Research Team View:

Preqin’s survey data shows that investors and fund managers are thinking long term and continuing to invest in alternative assets. Meanwhile, fund managers were continuing their work of searching for value and opportunity in a challenging environment for returns. We think that investors recognized that diligent fund managers will always have a strong record of delivering superior returns through the cycle, in bad times as well as good times. In fact, some of the very best investments will be those made during the depths of the downturn and in the recovery from it.

Takeaways from the survey:

  • Fund managers recognise that returns on their existing portfolios will be reduced as a result of the impact of COVID-19. However, they are not reducing targeted returns for new investments (i.e., there will be attractive investments to be made);
  • Fund commitments will slow in 2020. The reasons for this include the difficulty of completing assessment and due diligence without face-to-face meetings, and the Denominator Effect as the rest of the portfolio is revalued downwards;
  • Fund managers are bullish about their medium- to long-term plans, with a continued trend toward higher allocations (and if anything, they consider COVID-19 more likely to accelerate this trend than to slow it down);
  • Fund managers are actively considering which sectors and industries are most attractive in the new environment (healthcare, logistics, software, distressed debt), and which are less attractive (retail, retail real estate, energy);
  • Fund managers are confident that alternative assets will adapt to COVID-19 and will emerge stronger from it.

In other words, yes there is a major short-term impact, but fund managers are thinking long term and continuing to invest in alternative assets.