What’s the impact of COVID-19 on portfolio valuations?

The overall market decline resulting from a worldwide reaction to COVID-19 signals that private equity investments will need repricing. In evaluating the nature and extent of the impact on a business, its income forecasts and valuation assumptions, funds should consider issues such as:

• Store or facility closures

• Loss of customers or customer traffic

• The impact on distributors

• Supply chain interruptions

• Production delays or limitations

• The impact on human capital

• Regulatory changes

• The risk of loss on significant contracts

The slowdown in the economy from COVID-19 will likely lead to many performing instruments becoming distressed. This can be anticipated through the monitoring of several key factors, including:

• Declines in enterprise value and coverage ratios

• Breaches of financial covenants

• Key customer or supplier impacts that will lead to diminished cash flow in the future

Valuing distressed debt may be more complex than a straightforward yield analysis, with special attention needed to determine:

• Likelihood of default

• Ability to make cash payments in both near and longer-term

• Waterfall coverage for different tranches under a distressed/liquidation value

• The impact of the crisis on the value of the collateral

• Ability to restructure the instrument

Real estate investments are generally less susceptible to market volatility, but are subject to similar business pressures, as tenants face the pressures described above.

• Given the ongoing decline in energy markets at the same time as the COVID-19 crisis, geographical areas with a dependence on sectors, such as oil and gas, are facing even more significant impacts.

• In addition, real estate investments in the hospitality, gaming and transportation industries, such as hotels, casinos, and parking garages, will see significant short-term and potentially long-term effects on their underlying real estate forecasts and valuations.

• Other real estate asset types such as data centers, cell towers and telecommunication and data, and warehouse and logistics may see increased long-term demand as businesses adjust their operations to a post-COVID-19 world.