Private markets: The view from a CIO’s dashboard

The last few weeks have been a whirlwind. Public markets are reacting with extreme volatility as they struggle to process a flood of news and determine economic implications amid significant unknowns. 

How does this look through the long-term lens of private markets investing? Mark Everitt, director of research for BlackRock Alternative Investors, says that for private market investors, the current turbulence is “a live test of underwriting and portfolio construction processes conducted over the last few years.” At the same time, market dislocations can also create potential opportunities for private capital—the foundations for future long-term returns. 

Mark discussed these twin themes with BlackRock Alternative Investors CIO Jim Barry as part of our March 18 webcast, Private markets in a time of turbulence. In his role as CIO, Jim has visibility across the private markets, including real assets, private equity and private credit. Highlights from their discussion:

Let’s start with a quick summary of how you see the world today.

What’s unique about this crisis is that it’s all being driven by a non-economic vector. It’s all about the virus. Its path, and the monetary and now fiscal interventions in response are the key to understanding how this will evolve. We’ll keep seeing volatility until we start to understand where it’s headed, what the load on the health systems is going to be, and the full set of policy responses.

A second unprecedented element is the pace and scale of the impacts, which brings its own stresses. We’re seeing supply and demand plunge in tandem, which makes it harder to counteract.

Asia is several months ahead of us in this crisis. What signals are we seeing there?

All eyes should be on China and APAC in terms of understanding what any bounce-back could look like. In China we’re already seeing some of the macro indicators come back to within 50% or 60 % of historic levels, which is encouraging. It’s early days, though. And there may be a bifurcation between general industrial and corporate activity and consumer behaviour, particularly behaviour that requires consumers to leave their homes.

As an example, we have some direct investments in car parks in Shanghai. Their workday bounce-back has been substantial, with a lot of new customers looking for short term contracts as they move from public to private transport as they go back to work. But at the weekends, those same car parks are dead. 

Looking at APAC will help us understand the economic implications as we start to get the disease under control elsewhere in the world.

Turning to our investment portfolios, what are you focused on?

Everyone’s reviewing all their investments.  At BlackRock we’ve already done an initial sweep across our portfolios and identified potential vulnerabilities. It’s an asset-by asset process, and the true assessment comes from really understanding the cashflows. You need to look at their resilience in a new macroeconomic context. In our underwriting, especially for the past two years, we’ve been factoring in some form of recession, but nothing with the pace and impact of what we are seeing in 2020.

We have a big focus on both the liquidity within the business, and then any liquidity dynamics associated with the capital structure. Particularly any requirement for a refinancing, or for that matter an opportunity for a refinancing to take advantage of monetary easing.

There are portfolio level checks, such as confirming intended resilience from geographical diversification. And there’s a great deal of revisiting asset-level underwriting: How much of the revenues are tied to fixed price contracts or volume commitments? What’s counterparty risk, and how are the counterparties doing? We need to be sure we understand the resilience of the capital and covenant structures for all our assets.

What about potential opportunities?

Obviously, the existing portfolios are getting a lot of attention, but we’re not closed for business. For anything in the pipeline we’re taking a real step back, not just to re-underwrite the context, but also because pricing is now massively uncertain. Certainly, there will be a drive to quality, and we do see opportunities, particularly toward the end of the second or third quarter as companies look to get liquid. They may do this through the sale of quality assets, often off-market—bilaterally, so they can be done quietly.

Private markets can provide solutions for companies or projects when public markets have grown volatile and risk averse. Speed and the ability to structure deals and handle complexity are important advantages, and we see them coming into play as we start to work through this major dislocation.