Director of BlackRock Luxembourg Gisèle Dueñas Leiva, pictured, says the coronavirus crisis is reshaping the investment landscape
How to invest during a health and economic crisis? Jim Barry, investment director at BlackRock Alternative Investors and Gisèle Dueñas Leiva, director of BlackRock Luxembourg, discuss the differences of the current crisis compared to that of 2008, as well as the main investment trends in the private markets.
The coronavirus crisis has had an accelerating effect on structural trends such as e-commerce and sustainability, while intensifying the phenomena of demon-globalisation and geopolitical fragmentation. It could generate a generational shock in the emerging world. These trends are fundamentally reshaping the investment landscape. Among the actions that investors must take today, the most important is to re-evaluate the strategic allocation of their assets to ensure that their portfolios are resilient to these macro trends.
In this highly uncertain environment, ensuring portfolio resilience involves much more than taking into account the correlations between various public market asset classes. Private markets offer this option, particularly through exposure to emerging technologies and other trends in the real economy that are less accessible through public markets.
Impact of the pandemic on investment in private markets
The size of the private markets has tripled since 2007: they represent 8,000 billion dollars today compared to 2,500 billion dollars at the time. In fact, they constitute a vast part of the investment universe. 
This growth is also evident in Luxembourg, where the hedge fund industry is constantly developing. Since 2018, the size of the average private equity fund domiciled in Luxembourg has increased by 50%  and the assets under management of private debt funds in Luxembourg have also increased by 40% in the space of two years to reach €56 billion of assets under management. 
In our view, the increase in the overall size of private markets and the greater variety of investment types will result in a greater prominence of private capital in the coming economic recovery. These markets offer fast and flexible investment opportunities, and the capital obtained by companies through these markets can help finance projects that would not be possible in public markets.
Testing the resilience of alternative investment markets
The pandemic is a test of the resilience of alternative investment markets that include assets such as private equity, infrastructure, real estate lending and hedge funds. These are long-term investments. Anticipating periods of crisis and searching for allocation strategies offering resilience characteristics are therefore an integral part of the investment process. This resilience was illustrated in the valuation of assets on the private markets in the first quarter and in the relative recovery of the second quarter.  Private market investment continued, especially for diversified assets, as well as assets based on solid fundamentals and those related to long-term trends such as the global energy transition.
There was a shift from the most severely impacted assets such as those related to the tourism, real estate and transportation sectors to assets with stable fundamentals such as technology, parts of the health sector and distribution centers.
Emerging investment trends in an uncertain environment
First of all, it should be noted that the policy measures taken to mitigate the impact of the virus are unprecedented. Their implementation is not without risks, but if they are successful, even in the most pessimistic scenarios, the cumulative economic damage should be less than that known in the wake of the 2008 global financial crisis.
However, the level of uncertainty about other factors is higher today than it was before the coronavirus crisis. These include the potential risk of a second wave, geopolitical tensions, and the uncertain outcome of the US presidential election in November. Long-term transaction financing must therefore remain robust in this context.
Second, the changes in the economy are likely to be much more pronounced than those experienced in the aftermath of the major global financial crisis. We are already seeing that this crisis is having an accelerating effect on certain trends, such as the decline in physical outlets, while other trends are being reversed, such as our dependence on supply chains.
Investors making illiquid long-term investments in real businesses and assets need to consider how these trends and risks will evolve.
The third key concept is that of sustainability. Some argue that it is a luxury we cannot afford in times of crisis. We disagree. If covid has taught us anything, it is precisely how quickly a non-financial risk can become financial. In our opinion, taking into account environmental, social and governance (ESG) criteria in investment strategies allows us to better understand financial risks. This implies, in particular, taking into account the risks related to climate change and the impact on policies and markets, especially for illiquid and long-term investments.
We observe investment opportunities in the private equity, credit, real assets and hedge fund markets. These opportunities include:
Liquidity bridges: capital injections for senior companies that have lost bank financing or need a bridge due to liquidity problems. As such, it is interesting to note that, should the crisis be prolonged, the damage to the real economy will manifest itself in assets under pressure and that private markets can inject capital through investment solutions or in a crisis situation.
Forced sales: sellers will want to dispose of their assets, and speed, trust and confidentiality will therefore be essential. We therefore expect quality assets to become available at a good price.
Opportunities are emerging
The secondary market for private equity represents one of the most prominent opportunities in this respect. As the year progresses, we expect to see an increase in the number of transactions initiated by limited partners (LPs) wishing to sell their interests in private equity funds. Some of these transactions will be driven by the “denominator effect”, where investors seek to rebalance their portfolios after a devaluation in the public market.
The acceleration of structural trends is leading to the emergence of complementary investments in certain sectors. Indeed, there are opportunities in healthcare, energy transition, technology and real estate. The healthcare sector provides us with a good example of an opportunity with telemedicine. These opportunities are appearing in the private credit and private equity markets.
The transition to a low-carbon economy is another good example. Investments in solar and wind power generation assets have proven their resilience during the crisis and have the advantage of being intrinsically linked to a long-term structural change towards greener production capacities based on an attractive economy and a change of mentality in society.
In conclusion, we anticipate more investment opportunities in the private markets both in terms of structural trends and transactions. Investors with access to transactions that are completed quickly and take into account the specificities of the local market will be able to create value and access attractive returns in the new environment.
1] BlackRock Investment Institute, Preqin data, June 2020.
2] The ALFI/Deloitte Private Equity and Venture Capital Investment Fund Survey 2019, June 2019
3] The ALFI/KPMG Private Debt Fund Survey 2019
4] In Q1, private placements fell by 10 to 15% with some variations depending on the sector. Real estate and private credit experienced more moderate declines of up to 5%.
This article was originally published in French on Paperjam.lu