BY DOUGLAS WEILL, HODES WEILL & ASSOCIATES, AND JOHN M. FERGUSON, GOODWIN PROCTER
Today’s funds should fare better than those that faced the challenges of navigating the GFC storm. This, of course, assumes any COVID-19-driven market correction presents fallout comparable to, or less severe than, the industry experienced during the GFC.
The investment performance of pre-GFC vintage funds suffered, with 2004, 2005 and 2006 vintages delivering average negative net IRRs and sub-1.0x equity multiples. But the dispersion in returns between top- and bottom-quartile performing funds during this time period was notable, with the delta in equity multiples averaging 0.7x. This compares to an average delta of 0.3x during other years. Funds that were able to manage through the crisis and benefit from the subsequent recovery in portfolio valuations to pre-crisis levels, ended up delivering net positive returns.
Now, as property markets face a likely downward correction in valuations, managers and institutional investors are actively assessing the risk profile of their REPF portfolios. But market participants can, and should, take comfort in knowing that REPFs are reasonably well-positioned for this downturn relative to pre-GFC funds. Specifically, changes to practices and terms around leverage, liquidity and fund governance should contribute to a more favorable outcome — if the aftereffects of COVID-19 are comparable to those following the GFC.
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