Wednesday18 March 2020 ★ FINANCIAL TIMES 15
COMPANIES
M A R K VA N D E V E L D E— NEW YORK
K AY E W I G G I N S A N D A R A S H M A S S O U D I
LONDON
A mix of fear and optimism is sweeping
through the private capital industry.
“I’m not happy about the people that
are sick,” said a Wall Street executive,
speaking from the secluded neighbour-
hood where he and others are hoping to
ride out thecoronavirusoutbreak.
But he is also not sorry to see the back
of along boomin financial markets,
when investors complained that so
much money was chasing too few deals
and attractively priced assets were hard
to find. “The world appropriately com-
pensating people for risk — yes, I am
[happy about that],” added the execu-
tive.
This month’s financial turmoil should
have been a moment for private equity
firms to savour. Over the past decade
they have persuaded public pension
systems, sovereign wealth funds and
other investors to commitrecord
amounts of cashto the sector.
The result is a $2.5tn war chest for
investment strategies that range from
buildingreal estateandinfrastruc-
tureto fundingloans for midsize busi-
nessesand taking over enormous corpo-
rations. Putting all that money to work
has been difficult. Now, with plenty of
cash on hand and markets in freefall,
many rainmakers believe they are
finally set to strike the deals of a life-
time.
Yet for others, the sense of opportu-
nity is tempered by a dilemma. Yes,
assets are cheaper, but some private-eq-
uity owned companies are facing ruin.
Meanwhile, the industry’s $2.5tn of
committed capital has to be called up
from potentially skittish outside inves-
tors and primed with trillions of dollars
of now-scarce acquisition financing. All
of this means that — at the crucial
moment — the powder may turn out not
to be so dry after all.
“It feels like the world is falling apart,”
saidRaymond Svider, chairman ofBC
Partners, a €22bn London-based firm
whose portfolio companies sell every-
thing from dog food to satellite broad-
band services. “Most of us who have
been there before would love to put
money to work and be opportunistic.
[But] there is no debt available right
now to finance acquisitions,” he added.
“Plus we all have portfolio companies
which are experiencing unprecedented
situations and which we have to focus
on.”
If there is money to be made amid the
financial wreckage of the coronavirus
crisis, then among the first to try to
claim it will be the debt-focused funds
that have supplanted banks as chief
lenders to a swath of medium-sized
businesses.
“We’re investing in [companies] that
might have liquidity problems,” in sec-
tors like travel, restaurants and cine-
mas, said one credit-focused executive.
“We don’t think the business models are
going to evaporate.”
Private debt funds usually charge
higher interest rates than banks. But
“the fact that we’ll try to figure out
something, and actually do it right now,
is really valuable,” the executive added.
Much of his fund’s cash comes from
institutional investors who are locked in
for years, enabling it to keep lending in
choppy markets that force banks to
retreat.
“It’s worth starting to spend,” said
Howard Marks, the billionaire co-
founder ofOaktree Capital Manage-
ment, the world’s largest investor in dis-
tressed assets. He has warned for years
that overconfident lenders were falling
over each other to write cheap and risky
loans. “When people are risk-oblivious,
we should be terrified,” he added. “But
on the other hand, when they’re terri-
fied, we can be aggressive.”
If a downturn spells opportunity for
Mr Marks, for some of his counterparts
at buyout funds, it promises trouble.
Private equity firms have made invest-
ments in everything fromtheme parks
(Blackstone’s Merlin Entertainments)
and holiday companies (Apollo’s Dia-
mond Resorts) tocasual diningchains
(Hony Capital’s PizzaExpress)—all sec-
tors that will be hit by “social distanc-
ing” policies intended to curb the coro-
navirus’ spread. At some firms, execu-
tives have spent the past week
“assess[ing] existing portfolios, taking a
look at what their liquidity needs might
be,” said Morri Weinberg, a partner at
Ropes & Gray, a global law firm.
For others, new deals will be a prior-
ity, said Dan Zilberman, head of Europe
at private equity firm Warburg Pincus—
once the safety of staff is assured and
portfolio companies are taken care of.
“We’re obviously going to be thoughtful,
but we’re here to invest,” he said. “We
can look past short-term events and
take a view on the long-term value of
companies.”
Similarly, Swiss private equity firm
Partners Groupwill look to buy public
companies that were “prohibitively
expensive” before the financial tumult
of the past few weeks but which “may
look more attractive today if valuations
remain at these levels,” said David Lay-
ton, its co-chief executive officer and
head of private equity, on an earnings
call yesterday.
He said Partners Group is also plan-
ning to approach owners of “solid
assets” with “proposals for capital if
they need it”. The firm is targeting high-
quality companies that could benefit
from long-term trends, rather than “dis-
tressed or troubled investments,” he
said.
Other groups are also being opportun-
istic. Phones have been ringing inces-
santly with private equity dealmakers
wanting to snap up public companies,
said one senior investment banker,
“because everything is cheap”. Some
buyout firms are being egged on by
activist investors, who are eager to force
sales amid the chaos. But closing deals is
likely to prove difficult. Logistically, it is
disrupted by dealmakers working from
home, and site visits for due diligence
becoming impossible.
And many private equity executives
are resigned to having to use their own
capital to cover a bigger share of the
price of any new acquisitions, if they can
find a lender at all. A few buyout execu-
tives fret investors might have trouble
coming up with cash to meet capital
calls—although Mr Weinberg at Ropes
& Gray said that even in 2008, such wor-
ries almost always proved unfounded.
Perhaps the most stubborn obstacle
Dealmakers seek opportunity amid the chaos
Falling market raises prospect of strong returns for adventurous buyout groups but financing is in short supply
Rising leverage
Share of US leveraged buyout market, by level ( )
Sources: Thomson LPC; Bain & Company; PreqinAs of year end
Less than x
x to x
Greater than x
Private equity’s record cash pile
Global private uncalled capital, by fund type (tn)
*Includes fund-of-funds, secondaries and co-investments, mezzanine, direct lending, natural resources,
distressed PE **Includes balanced and buyout fundsBuyout**
Real estate
Venture capital
Growth
Infrastructure
Other*
O RT E N C A A L I A J— NEW YORK
R O B I N W I G G L E S WO RT H— OSLO
M I L E S K R U P PA— SAN FRANCISCO
Renaissance Technologies, one of the
world’s biggest hedge funds, has been
tripped up by the market turmoil
unleashed bycoronavirus, underscor-
ing how even the industry’s leading
names are struggling to navigate the
financial chaos.
It has been a rocky year for the $75bn
computer-powered “quantitative”
hedge fund. Renaissance’s stocks-fo-
cused fund had one of its worst months
in more than a decade in February after
losing more than 7 per cent. It managed
to pare back some of those losses in the
first week of March but suffered another
setback when the turmoil worsened last
week.
The Renaissance Institutional Equi-
ties fund is down 12 per cent in the year
to date, whileRenaissance’s Institu-
tional Diversified Alpha fund has
declined by 10 per cent.
RIEF was downabout 5.5 per cent this
month through to the end of Friday,
according to two people briefed on the
numbers, after gaining close to 5 per
cent in the first week of March. RIDA
was down 7.4 per cent this month, eras-
ing gains of 5 per cent through the first
week of this month.
Renaissance declined to comment.
Renaissance is secretive, even by the
standards of the hedge fund industry.
But it is one of the investment industry’s
most fabledgroups, having helped pio-
neer the trend of using computers and
algorithms to unearth faint but persist-
ent signals in a sea of data. That even
Renaissancehas stumbled reveals the
turmoil in markets.
Investors belatedly started grappling
withcoronavirusin February, but the
turbulence that started last month has
paled next to the mayhem that has
enveloped markets in March.
Despite the Federal Reserve’smoves
to support economic growth and but-
tress financial markets — culminating in
slashing rates tonear zeroand restart-
ing its quantitative easing programme
on Sunday — markets have remained
exceptionally rocky.
The S&P 500tumbled12 per cent on
Monday — its biggest one-day fall since
“Black Monday” in 1987 — and extend-
ing its tumble from a February peak to
almost 30 per cent.
The Vix index of volatilitylept
beyond its financial crisis-erahigh.
“A pandemic sweeping across the
globe leaving unprecedented human
turmoil in its wake while also abruptly
freezing economic activities has
brought the longest bull market in US
history to a crashing and swift end,” said
Jim Paulsen, chief investment strategist
at The Leuthold Group.
Theturbulence has hammered many
investment groups, including hedge
funds that can seek to profit both from
markets rising and falling. HFR’s global
hedge fund index was down 4.5 per cent
in the month through to March 13.
Equity hedge funds had lost 9 per cent,
and after Monday’s mayhem the losses
will probably be even more severe.
Renaissance Technologies was
founded by the geometer andCold War
codebreaker Jim Simons in 1982. After
struggling to make headway in consist-
ently using computers and complex
models to unearth lucrative trading pat-
terns, the hedge fund eventually started
racking up profits, the like of which the
investment industry has rarely seen,
both in terms of size and consistency.
Its flagship fund Medallion was so suc-
cessful it kicked out external investors
in 2005, and has since only managed the
wealth of Renaissance’s executives.
Mr Simons said last year that it had
delivered an annual average return of
about 40 per cent since 1988, even
after charging employees an unusually
large fee for keeping their money in the
vehicle.
Financials
Star hedge fund Renaissance suffers setback
Renaissance was founded by Jim
Simons, the Cold War codebreaker
‘We can look past short-
term events and take a
view on the long-term
value of companies’
Fast track to success: infrastructure
is among segments that will be
considered by private equity groups
as they search for the deals of a
lifetime— Chris Ratcliffe/Bloomberg
of all is the enduring optimism of the
sellers. In a falling market, “you’re only
going to buy at tomorrow’s price,” said
another private equity executive. “And
[the seller] still wants yesterday’s price.
So in the first two, three or four months
when things fall, everything just stops.”
That is a scenario that rings true to
many buyout veterans. Whether
because of the ailments of their own
investment portfolios, or the virus
spreading in the world beyond, “the
shutters are coming down everywhere,”
said a top dealmaker at a large private
equity firm. “It’s going to be a slow,
weird year.”
‘When people are risk-
oblivious, we [are] terrified.
When they’re terrified, we
can be aggressive’
MARCH 18 2020 Section:Companies Time: 17/3/2020-17:29 User:andrea.crisp Page Name:CONEWS2, Part,Page,Edition:USA, 15 , 1