Covid impact v4 - edited

The Impact of COVID-19 on Private Equity
By Kenneth Yeo, CIO
The global economy has seen one of the longest expansions in history after hitting a
trough in 2009. Many crystal ball-gazing economists have been predicting that a recession is
long overdue. However, no one could point to an event that would break the camel’s back
until now.
1Mortality rate estimate by the World Health Organization (WHO) as of March 3, 2020.
Insights, 12 March 2020: Impact of COVID-19 on Private Equity
© 2020 Xen Capital Asia Pte. Ltd. (UEN 201724182H) All Rights Reserved.
The Sino-US trade war looked like a doomsday catalyst last year, but
the global economy weathered it with ease. Then, just when
everyone was projecting that the post-trade-war year of 2020 would
be one of renewed growth, the black swan event turned out to be an
influenza-like virus with a 3.4% mortality rate1.
An initial market correction in February (MSCI World declined 11.9% from February 19
to 28) was met with enthusiasm, as bargain hunters saw the index recover one-third of the
decline. Investors looked into the rearview mirror at what had happened during past viral
outbreaks and concluded it would be contained within China and everything would be over
by summer. The following chart shows the performance of the S&P index 6 months and 12
months after the first case of various virus infections were confirmed.
Source: Dow Jones Market Data
However, COVID-19 appears to be much more contagious than past viral infections
and is spreading rapidly outside of China. The fear it strikes into people has paralyzed
nations, and economic activities have come to a standstill in the regions most impacted by
the virus. It will likely drag the world into a recession if it’s not contained within the next few
months. Whether it will be a short or long-term recession depends on how quickly the virus is
contained and business activities can go back to normal.
6M S&P % change 12M S&P % change
S&P Index Performance After First Confirmed Case of Virus infection
-20% -10% 0% 10% 20% 30% 40%
Measles/Rubeola (Jun-19
Zika (Jan-16)
Measles/Rubeola (Dec-14)
Ebola (Mar-14)
MERS (May-13)
Cholera (Nov-10)
Swine flu (Apr-09)
Dengue fever (Sep-06)
Avian flu (Jun-06)
SARS (Apr-03)
Pneumonic plague (Sep-94)
HIV/AIDS (Jun-81)
n/a

Private equity funds are typically close-ended funds with a fund term of 10 years or more.
Unlike the Global Financial Crisis (“GFC”) of 2008, which was a liquidity-driven shock
that could be combated with interest rate policies and liquidity injections by central banks,
COVID-19 has caused a demand-driven shock which cannot be easily remedied by
government and central bank intervention. Companies are ill-prepared for this shock and
may fail quickly. The first to fail will likely be those directly impacted by the fear brought
about by the virus such as the retail, F&B and travel industries. Massive layoffs may also
follow as companies cut costs to stay afloat, which will have a further detrimental effect on
demand.
How to Not Lose Sleep Over Market
VolatilityGlobal stock markets have been on a roller coaster ride since the start of the COVID-
19 crisis. Just when people thought it couldn’t get any worse, the Russians and Saudis
created more havoc by entering into a price war over crude oil.
Some may view this as a negative, but the long-term nature of the fund is a key contributing
factor to its outperformance.
Mutual Funds & Hedge Funds …
Which invest in public stocks will not only
suffer the full force of market volatility, but
may also face the prospect of heightened
redemption rates from investors
Private Equity Funds ...
Are better-positioned to take advantage
of market volatility. Investments in private
equity funds are illiquid, which enforces
investment discipline over the long term.
Most of us have the tendency of following the crowd when we invest in stocks, which
could result in us buying at the top of the market and selling when the market is down, as our
investment behavior is often driven by greed and fear. Few of us – even professional stock
managers – can consistently outperform the index. Successful private equity investing
requires a disciplined approach with the aim of generating good long-term returns.
The price war
caused the US
stock market to be
halted on Monday
(March 9, 2020)
when it hit the
circuit breaker of a
7% decline at
market open, the
first time this has
happened since
1997.
The CBOE
Volatility Index
(VIX), a measure
of stock market
volatility, hit an
intraday high of
almost 60 points,
a level not seen
since the GFC.
0
20
40
60
80
2,500
2,750
3,000
3,250
3,500
2-Jan 15-Jan 28-Jan 10-Feb 23-Feb 7-Mar
S&P500
Closing
Price
VIX Intraday
High
Source: Yahoo Finance

There are two levels of this discipline:
1. Investment Period of the Fund
Private Equity Funds Public Equity Funds
A manager raises a fund every 3-5
years and invests the fund over a 3-
5 year period, which is the
Investment Period of the fund
Public equity funds tend to be fully
or close to fully invested right after
the fund is raised
Impact of a Financial Crisis
If the crisis happens during the
early part of the fund’s Investment
Period, the fund may not be badly
affected as it can utilize the
remaining capital to acquire
investments at distressed prices
after the crisis A financial crisis will have an
immediate and devastating impact
on public equity funds
If the crisis happens after the fund
is fully invested, part of the portfolio
would have been invested several
years before the crisis when
valuations were less frothy
2. Redemption Terms of the Fund
Private Equity Funds Public Equity Funds
Investors cannot redeem their
investments prior to the end of the
fund term. This gives the fund
manager time to help the portfolio
companies weather the crisis
Hedge funds and public equity
funds on are forced to sell during a
crisis because they are faced with
redemption from investors, and
their selling often exacerbates the
decline of the stock market

The following chart shows the long-term return vs. volatility of the various asset
classes. It shows that private equity has delivered a higher return on lower volatility than
public stocks.
For example, during the GFC, the S&P Index dropped 47% from peak-to-trough over
five quarters, while private equity returns fell a more modest 27% during the same period
(see table below).
While private equity funds would likely weather the storm better than public equity
funds, they will not escape unscathed. Unlike public equity fund managers that can continue
to trade stocks even when working from home, a private equity transaction requires face-to-
face interactions between the buyer and seller throughout the entire deal-making process,
from initial contact to due diligence, negotiation and closure. Deal-making would likely slow
down and possibly even grind to a halt if the situation worsens both in terms of making new
investments and negotiating an exit. For funds that depend on the IPO market for an exit,
they would have to hold onto their investments until the IPO market improves, or seek an
exit in the secondary market. For fund managers looking to raise a new fund, the fundraising
process will probably be prolonged as fund investors may not be prepared to travel to
conduct due diligence on managers.
However, all is not doom and gloom. As the Chinese saying goes, every crisis also
presents great opportunity.
Source: Preqin
Peak
Private Equity Dec 2007 Mar 2009 -27%
S&P 500 Sep 2007 Mar 2009 -47%
Trough % Change
5 Quarters
6 Quarters
Period
Historical Returns vs. Risk
Historical Annualized Volatility (%)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
HistoricalAnnualizedReturns(%)
Cash
Real Estate
Hedge
Funds Stocks
Private
Equity
Bonds
Source: KKR Global Perspectives
Note: MSCI AC World Gross USD for Listed Equities; Barclays GlobalAgg Total Return Index Unhedged USD for Fixed Income; Cambridge Associates Global
Private Equity for Private Equity; HFRI Fund Weighted Composite Index for Hedge Funds; and Barclays US T-Bills 3-6 Months Unhedged USD for Cash. Data
as at 1Q86 or earliest available to 4Q17, and de-emphasizing 2008 and 2009 returns t one-third the weight, due to the extreme volatility and wide range of
performance which skewed results. Source: Cambridge Associates, Bloomberg.

Private Equity Strategies That Can Succeed During a Downturn
Specialist Buyout Funds
During a recession, companies that have weak balance sheets in
sectors that are most affected by the slowdown will be challenged the
most. These companies need both capital as well as expertise to
navigate the current downturn. Buyout funds that have proven
experience in turning around distressed businesses and managing
complex situations are well positioned to profit from the downturn.
Secondary Stakes in Private Equity Funds
Good private equity funds typically trade in the range of -
10% to +10% relative to their net asset values. However,
in times of uncertainty, the discount could be much larger.
For example, during the GFC, there were brand-name
funds that were up to 30% funded and were being given
away for free to buyers, as the seller could not meet future
capital calls for the remaining 70% of unfunded
commitment.
Although we do not expect similar discounts this time as
there is an abundance of liquidity, we still expect some
good deals to emerge from panicked sellers. However,
gaining access to such opportunities is not easy as such
sales are usually not marketed widely. A good way to gain
access to secondary opportunities is to invest in
secondary funds.
Selective Late-Stage Unicorn Shares
Late stage venture-backed companies that have been queuing to
raise new capital from an IPO may suddenly find the IPO market
slowing down. Many of these companies will have to raise new capital
from investors to fund their growth, as most of them are still
unprofitable. In addition, some existing investors waiting for the IPO to
cash out may be forced to sell in the secondary market. This creates
opportunity for new investors to invest in them. However, one should
be selective and only invest in companies that will likely benefit (e.g.
life science companies) from the viral outbreak or at least not be
adversely affected by the crisis in the long term.
Secondary PE Stakes
PE fund commitments
bought from existing LPs

Examples of companies that were planning an IPO in 2020 in US and China
Company Industry
Last Market
Valuation
(US$ B)
Selected Existing Investors
Source: 2020 IPO Pipeline, SmartKarma
United States (Top 20)
Stripe Fintech 35.0
Andreessen Hororwitz, Sequoia Capital, General Catalyst Partners, Founders Fund,
Khosla Ventures, Kleiner Perkins Caufield & Byers, Tiger Global Management, DST
Global
Airbnb
Technology/
Hotel & Leisure
31.0
Technology Crossover Ventures, China Investment Corporation, T Rowe Price,
Temasek Holdings, Hillhouse Capital Management, Tiger Global Management,
Baillie Gifford, Kleiner Perkins Caufield & Byers
Palantir Technology 26.0 Founders Fund, Tiger Global Management, SAC Capital
DoorDash
Technology/
Delivery
13.0
CRV, Khosla Ventures, Sequoia Capital, Kleiner Perkins Caufield & Byers, SB
Investment Advisers, GIC, DST Global, Temasek Holdings, T Rowe Price
Wish Technology 11.2
GGV Capital, Legend Capital, Founders Fund, DST Global, Temasek
Holdings, IDG Capital, General Atlantic
Robinhood Fintech 8.0
Sequoia Capital, Index Ventures, New Enterprise Associates, DST
Global, Kleiner Perkins Caufield & Byers
Instacart
Technology/
Delivery
8.0
Tiger Global Management, Khosla Ventures, Sequoia Capital,
Andreessen Horowitz, Kleiner Perkins Caufield & Byers
Tanium Technology 6.5
Andreessen Horowitz, T Rowe Price, TPG, Institutional Venture Partners,
Franklin Templeton, Baillie Gifford
Databricks Technology 6.2
Andreessen Horowitz, New Enterprise Associates, Battery Ventures,
Future Fund, T Rowe Price, BlackRock, Tiger Global Management
Unity
Technology/
Games
6.0 Sequoia Capital, China Investment Corporation, Silver Lake
Fanatics
Technology/
Consumer
4.5
Insight Partners, Andreessen Horowitz, Temasek Holdings, Alibaba
Group, Silver Lake, SB Investment Advisers
Rackspace Technology 4.3
Sequoia Capital, Norwest Venture Partners, Searchlight Capital
Partners, Apollo Global Management
McAfee Technology 4.2 Summit Partners, TA Associates, TPG, Thoma Bravo
SoFi Fintech 4.0
Linden, DCM, Institutional Venture Partners, Third Point Ventures,
SoftBank Group, Silver Lake, Qatar Investment Authority
Credit Karma Fintech 4.0
Founders Fund, 500 Startups, Tiger Global Management, Viking Global
Investors, Silver Lake
Snowflake Technology 4.0
Redpoint Ventures, Madrona Venture Group, Sequoia Capital, Meritech
Capital Partners, Salesforce Ventures, Dragoneer Investment Group
Freshworks Technology 3.5 Accel, Tiger Global Management, Capital G, Sequoia Capital
DraftKings
Technology/
Casinos
3.3
Manhattan Venture Partners, Atlas Venture, GGV Capital, Redpoint
Ventures, DST Global
Procore Technology 3.0
Lead Edge Capital, Bessemer Venture Partners, Tiger Global
Management
GitLab Technology 2.8
500 Startups, Khosla Ventures, Tiger Management Advisors, Franklin
Templeton, Capital Group, Adage Capital Management

China (Top 10)
Company Industry
Last Market
Valuation
(US$ B)
Selected Existing Investors
Source: 2020 IPO Pipeline, SmartKarma
Ant Financial Fintech 150.0
General Atlantic, China Investment Corporation, Primavera Capital, CPP
Investment Board, Temasek Holdings, Warburg Pincus, T Rowe Price, Carlyle
Group, GIC, Sequoia Capital, Silver Lake, Baillie Gifford, Khazanah Nasional
Berhad
ByteDance Technology 78.0
Shunwei Capital Partners, Morningside Venture Capital, Sequoia Capital, CCB
International Asset Management, General Atlantc, Primavera Capital, KKR,
Softbank China Venture Capital
Didi Chuxing
Technology/
Ride-hailing
56.0
Legal Capital, Silver Lake, Mubadala Capital, BlackRock, SoftBank
Group, CBC Capital
JD Logistics Logistics 13.5
DST Global, Sequoia Capital, Insight Partners, Tiger Global
Management, Kingdom Holding Company, Tencent Investment
SDIC Power Industrial 7.9 State-owned enterprise
ChinData
Group
Tecchnology 6.9 Bain Capital
Megvii Technology 4.0
Sinovation Ventures, Qiming Venture Partners, CCB International Asset
Management, Russian Direct Investment Fund, Ant Financial, Alibaba Group, Abu
Dhabi Investment Authority
Tujia
Technology/
Hotel & Leisure
1.5
Lightspeed Venture Partners, CBC Capital, GGV Capital, Qiming
Venture Partners, Glade Brook Capital Partners
Insta360 Technology N/A
IDG Capital, Qiming Venture Partners, Everest Venture Capital, Zhuhai
Huaying Investment
Yeahka Technology N/A Infinity Ventures, Tencent Investments
Credit Funds that Specialize in Non-Performing Loans (NPL) & Distressed
Debt
The amount of distressed debt opportunities would increase if the global economy enters a
prolonged recession. The level of leverage as measured by Net Debt/EBITDA of the
Russell 2000 index, as seen in the chart below, has increased steadily since hitting a low in
2010 after the GFC on the back of low interest rates and an abundance of liquidity.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Highly leveraged companies can
be impacted in two ways – when
interest rates increase or when
profit declines. With interest
rates likely to remain low, the
real worry for companies is the
decline in revenue and
profitability, which will impact
their ability to service debt. There
will be rich pickings for credit
funds that specialize in buying
distressed debt and NPL.
Net Debt to EBITDA (Russell 2000)
Source: Bloomberg

Real Estate Funds
It’s fair to wonder why real estate would be a good asset class in the face of a potential
recession. Real estate investment returns are determined by three main factors: supply and
demand (for both rental and ownership) and interest rates.
Interest rates are expected to remain accommodative in the near future and be supportive of
real estate investment. As an indication of how low interest rates could go, Jyske Bank,
Denmark’s third-largest bank, announced in August 2019 that it is offering homeowners -
0.5% mortgage interest rates for a 10-year loan, which means homeowners are paid to take
on a mortgage. Similarly, some banks are charging customers for putting cash in the banks.
For example, UBS told its wealthy clients that it would introduce a charge of 0.6% a year if
they have more than €500k in cash deposits. With banks turning away cash, investors are
storing their wealth in gold and US treasuries, driving up their prices to multi-year highs.
80
100
120
140
160
180
200
220
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
United States Indicators
Real Estate CPI Median Household Income
Real estate has traditionally been a
solid means of storing wealth. Real
estate is also a good hedge against
inflation as it appreciates much faster
than inflation (CPI) as well as Median
Household Income growth, as seen in
the chart on the right. However, market
segments and individual property
selection coupled with good property
management post acquisition are
important in generating high returns. If
well managed, a real estate portfolio
can typically generate an annual cash
yield of 5-8% from rental income.
Conclusion
At Xen Capital, we are constantly looking for the best investment opportunities in
private markets that can benefit from short-term volatility to deliver solid returns to investors
in the medium to long term. We encourage you to sign up with Xen Capital at
www.xen.capital, so we can share with you the exciting opportunities we have curated for
our investors.

The Author
Kenneth has over 20 years of experience in the private equity industry.
He started his investment career with the Government of Singapore
Investment Corp. (GIC), where he spent 12 years, half of which was
based in GIC's overseas offices in Bangkok, London and the Silicon
Valley. Kenneth joined Allianz Capital Partners in 2007 as an
Investment Director, responsible for its private equity fund investments
in Asia. Most recently, he was a Senior Director at Azalea, a wholly
owned subsidiary of Temasek Holdings.
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Transforming Alternative Asset Management
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