Alternative Asset Investors Should Brace for Leaner Payouts

(Bloomberg) -- Investors should brace for sharply leaner payouts from venture capital, private equity and private debt funds for at least the rest of the year, according to a Setter Capital Inc. survey.

Payouts are estimated to drop by about one-third over the next three quarters versus the previous nine months, according to 72 managers who responded to the April survey. Toronto-based Setter is an intermediary of secondary market transactions.

Private equity, private debt funds and venture capital are asset classes in which wealthy families, as well as pension and endowment funds, have been dabbling as central bank easing since the 2008 global financial crisis eroded public-market returns. However, Covid-19 and an oil shock in March brought the party to an abrupt halt.

Fund managers now anticipate they’ll have to plow further capital into supporting existing holdings, or wait longer before they can exit.

All but a handful of the managers surveyed saw the U.S. heading into a recession. On average, they expect the economic slump to last about 13 months with public markets finishing the year around 13% lower. More than two-thirds believe public markets will approach their March 2020 lows again within the next six months.

The net asset value of funds is estimated to drop nearly 13% in the first half and managers expect to raise almost 20% less new capital this year after record takings in 2019.

Managers investing in startups and early-stage companies were the most pessimistic, expecting to raise 29% less capital and cut investor payouts by 44%. Managers investing in private debt were the most optimistic.

“Money follows performance,” said TJ Mondair, a member of Setter’s fund advisory team. Venture capital funds will find it harder to raise fresh money because of the gloomy outlook for companies that are generating less cash flow, while debt managers may be able to pick up some bargains as businesses struggle, he said.

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