Looking Beyond Black Swans & The Coronavirus
Author: John Scott - Head Of Institutional Investments @ NdG
The world is facing enormous challenges as governments, central banks and private sector companies endeavor to respond to the profound economic and social consequences of the COVID-19 pandemic. The abruptness of the global economic contraction and the concurrent lockdown of major cities is unprecedented.
In our opinion, a global recession is a reasonable scenario forecast.
International economic damage has quickly become palpable as businesses around the world struggle with the curtailment of commerce and travel. In our opinion, a global recession is a reasonable scenario forecast. Indeed, economic activity may be lower than the 2008-2009 trough levels of the Global Financial Crisis (GFC). Looking forward, however, the duration and severity of this contraction may be ameliorated by coordinated monetary and fiscal policy initiatives intended to revive economic growth.
The pain in Europe and the U.S. is severe and the underlying damage from COVID-19 is delivering a systemic shock. Both economies have important service sectors … a shift from prior generations when the production of goods accounted for a greater proportion of economic activity. Accordingly, it appears that sectors such as lodging, restaurants, hospitality, tourism, and airlines will be amongst the most disproportionately impacted industries.
THE MISSION CRITICAL INVESTMENT PROCESS
Firms such as Net de Gerrers, which manage private market investments in real estate, infrastructure and emerging growth companies, have arrived at this crisis following a decade- long cycle of growing transaction volumes, rising valuations, and record fundraising. Fortunately, this position of strength may serve as a bulwark, especially for those managers who have exercised prudence and pursued a disciplined investment process.
To be sure, there are fault lines in the real asset markets which have experienced a multi-year trend of increasing deal leverage and rising valuation multiples. Within this context, Net de Gerrers is committed to maintaining our mission-critical investment process. As always, our commitment is to prudently manage our investment portfolio, carefully assess new pipeline opportunities, and regularly conduct investment policy meetings while managing our operations through videoconferencing.
THE CAPITAL DEPLOYMENT PLAYBOOK
In our opinion, the precipitous contraction of public financial market valuations is concurrently creating unique opportunities for private market investors with “dry powder.” Clearly not all deals will be actionable, but a thoughtful and agile investment process will enable us to move opportunistically when attractive investments arise. Importantly, we will do so while ensuring the financial and operational integrity of our current portfolio companies and projects.
In our opinion, the precipitous contraction of public financial market valuations is concurrently creating unique opportunities for private market investors with “dry powder.”
During the past several years, managers of real asset portfolios (real estate, infrastructure, private equity, venture) have amassed over $2 trillion of “dry powder,” which is available for deployment. Long-standing investors in real assets have continued to increase their allocations to real assets while newer entrants – including family offices and high net worth investors–are investing in this sector for the first time. Accordingly, investment managers have more capital at their disposal than even before.
Our capital deployment playbook will be cautious and multi-staged. In our opinion, the most severely impacted industries (e.g. travel, leisure, lodging, entertainment) may hold the greatest cyclical recovery potential. Furthermore, infrastructure assets such as airports, ports and toll roads, which are being impacted by the economic shock of travel bans on non-essential travel, may also hold substantial recovery potential.
In our opinion, the most severely impacted industries (e.g. travel, leisure, lodging, entertainment) may hold the greatest cyclical recovery potential.
NDG’S COMMITMENT
In terms of our business model, the value of permanent capital is a significant advantage. NdG does not face the pressures attributable to daily liquidity requirements and redemptions which can force the untimely sale of portfolio holdings at distressed prices. The current financial market dislocations are certainly disturbing. However, the fee structure for private asset investment firms such as ours is based upon committed capital from long-term investors, which have historically sustained their allocations throughout prior economic and market cycles.
Within the context of this unfolding financial and humanitarian crisis, we are reaffirming our commitment to the principles of Environmental, Social and Governance (ESG) investing. At a time when public expectations regarding the role of business in society are rapidly shifting, we believe that Net de Gerrers should demonstrate leadership. Accordingly, we will continually evaluate our portfolio investments through the lens of social citizenship, which will inform our course through these unchartered waters.