In the news article, Part I: Handling Public & Private Market Volatility in Good Times and Bad, we explored how market volatility can pose challenges for institutional investors even in relatively calm times. These challenges are heightened exponentially in bad times – as with the current COVID-19 pandemic. In this article, we will examine the impact this pandemic is having on public and private markets – both from the perspective of what is happening now and what effects are likely to linger well into the future. Since Solovis focuses on the needs of asset owners and allocators, we’ll add our thoughts on ways LPs can gain more holistic, timely portfolio insights to help manage through this difficult time and better inform investment decisions going into the future.
A few facts: Most states in the U.S. have declared a state of emergency. On Thursday, March 12, 2020, a U.S. national state of emergency was declared to unleash federal funding. Worldwide, the situation in some countries like Italy and China is much worse. As of Monday, March 23, 2020, there were more than 341,500 known cases of coronavirus globally, including nearly 15,187 deaths, according to data compiled by Johns Hopkins University. In the United States, there have been at least 33,018 known cases, with at least 428 deaths, according to Johns Hopkins University.
Specific measures are being taken to contain the virus, including shutting down public and private schools and universities, eliminating non-essential travel, advising employees to work and conduct business remotely, postponing or canceling events where large gatherings occur such as conferences or conventions, closing restaurants, bars, movie theaters and gyms, and more. The impact this will have on the global economy for the long term is very real.
To put this into perspective, a quick calculation of three major public market indicators shows the following deltas over only a one-month timeframe from February 20, 2020 to March 20, 2020:
- Dow Jones Industrial Average: a 35.30% decline
- S&P 500: a 31.61% decline
- NASDAQ Composite: a 28.51% decline
The public markets impact is readily evident and easy to monitor and measure. Private market volatility, however, is a different story. Even under normal circumstances. Asset owners and allocators are challenged with figuring out how to account for allocations to private investments due to their inherent illiquid nature. In times of extreme volatility, that challenge can be completely overwhelming. Contemplating the effect this will have on things like hospitals’ ability to provide healthcare to the masses, airlines’ revenue plunge over the travel shut down, local businesses that are forced to close their doors and thus unable to continue paying staff, etc., etc. There will of course be a global economic and financial response, but no solution to slow down the spread comes without great cost to the economy. The extent of the risk factors that are involved here are unprecedented. First-hand experience suggests at least 20% lower valuations across all portfolios.
So…. what to do from here.
Most importantly and above all, conducting business as usual to the greatest extent possible in both the public and private sectors, and doing this while minimizing the effect of known health risks by exercising the appropriate level of caution − without ensuing panic − is the best thing to do to minimize market volatility. The best thing private market investors can do from there is fulfill their obligation to reflect the known certainty of the situation, and predict future liquidity needs and performance using accurate information when available and educated assumptions when information is limited.
Applying some best practices and consistency in approach is a sound strategy. Among other requirements, this includes:
Dealing with the inherent volatility of public and private investments by applying deep analytical rigor – meaning:
- Understanding and then reflecting the unique impact and risks associated with the range of asset classes, based on relevant risk factor exposures
- Meaningfully assessing current and expected performance and closely tracking associated investment managers
Leveraging technology and collaborative processes to effectively assess the impact of such sharp changes, i.e. of the COVID-19 nature, in the valuation of all holdings, both individually and as a component of the entire portfolio.
These two core points beg the question as to how this should be done. Institutional investors need automated portfolio management technology that is designed for the nuances inherent in managing multiple public and private assets– including:
- Collecting and aggregating data across a wide range of asset classes, including private investments, with a superior level of efficiency
- Handling timing lags appropriately and making sure all public and private investment and related data is presented to investment teams as soon as it’s available
- Modeling the impact market factor changes have on investment risk and valuations on an ongoing and frequent basis, whether via direct, proxying or some other customized method, and not just when there is a financing or liquidity event
- The ability to forecast the risks, performance and valuation of these investments to support making the best decisions for constituents, both today and on an ongoing basis
The above practices cannot be accomplished without a strong foundation in place. Asset owners and allocators require a robust, flexible platform that can apply the expected marketplace standards, but also the level of customization required to suit a dynamic situation, such as COVID-19, when needed. Most software products that serve LPs provide updates monthly, and some of the illiquid investments that must be incorporated alongside all others only price quarterly or even annually, which is simply unacceptable in situations like this. A platform that that can support daily, weekly and monthly updates for both public and private assets, with a single view across the portfolio, is an absolute must!
Interpretations will likely vary widely across the industry, thus remaining fluid, as new information continues to unfold. Technology that can adapt and react quickly and support daily information feeds across asset classes is critical in successfully weathering the storm and managing through the uncertainty.
To find out how you can put all of your public and private assets onto a single platform with daily data updates across asset classes, supported by flexible reporting and analysis tools, explore the Solovis platform.
This article was originally published on Solovis.com.