Are Family Offices Growing Queasy About Private Equity?
Family office investors say they view private equity with ‘greater caution’, after the pandemic-induced economic crisis. That’s according to a recent survey of 120 family offices by banking giant UBS.
The survey found that the proportion of family office investors who expected private equity assets to outperform dropped from 73% to just under 51% between March and May of 2020. In other words, only one in two family offices expect private equity to deliver outsized returns over the near term.
The apprehensions seem to be justified. Private equity assets seem to be at the epicenter of the ongoing crisis. The types of alternative securities private equity firms tend to focus on have been particularly hard hit in recent months. This year, credit rating agency Moody’s put nearly 20% of all collateralized loan obligations (CLO) bonds that it grades on a watch list for downgrades. Ratings agencies have also downgraded corporate and commercial real estate bonds, as companies laid people off and properties remained shut during the crisis.
The crisis is far from over. In fact, the International Monetary Fund (IMF) predicts the rate of bankruptcies for small and medium-sized businesses could tripled from 4% last year to over 12% this year across 17 countries. Private equity firms tend to hold several SMEs in their portfolio. In fact, one giant recently completed an acquisition of an airline. Toronto-based Onex Corporation completed the deal to purchase WestJet months before the crisis hit, serving as an example of the heightened risks these private equity behemoths now face.
With alternative assets in the eye of the storm, family offices’ flight to safety seems justified.