Fitch Ratings-New York-22 November 2021: Private equity (PE) collateralized fund obligations (CFOs) rated by Fitch Ratings have exhibited stable performance since recovering from the coronavirus-driven economic downturn and market volatility, with cash flows and loan-to-value ratio measures returning to pre-pandemic levels or better. Driving this performance are significantly improved market conditions and the transactions’ structural features, such as de-leveraging mechanisms.

One PE CFO was issued in 2021 (Astrea VI, in March 2021), a figure similar to 2020. Uncertainty caused by regulatory proposals as well as the pandemic-driven market volatility has hampered issuance in both years. As the pandemic recedes and regulators provide additional clarity, the market may rebound in 2022.

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Private equity (PE) collateralized fund obligations (CFOs) rated by Fitch Ratings have exhibited stable performance since recovering from the coronavirus-driven economic downturn and market volatility, with cash flows and loan-to-value ratio (LTV) measures returning to pre-pandemic levels or better. Driving this performance are significantly improved market conditions and the transactions’ structural features, such as de-leveraging mechanisms. Transaction-specific charts and tables on pages 4-6 provide additional details.One PE CFO was issued in 2021 (Astrea VI, in March 2021), a figure similar to 2020. Uncertainty caused by regulatory proposals as well as the pandemic-driven market volatility have hampered issuance in both years. As the pandemic recedes and regulators provide additional clarity, the market may rebound in 2022. Fitch expects that PE CFO ratings will remain stable in 2022, while some tranches could be upgraded if they continue deleveraging. Transactions’ performance will be driven by expected global economic growth. Fitch expects active capital markets and PE funds’ exit activity to generate consistent cash flows and support liquidity for Fitch-rated PE CFOs, although a market dislocation could pause this trend.

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The year 2020 was turbulent for private markets, as it was for much of the world. We typically assess meaningful change in the industry over years or decades, but the pandemic and other events spurred reassessment on a quarterly or even monthly basis. Following a second-quarter “COVID correction” comparable to that seen in public markets, private markets have since experienced their own version of a K-shaped recovery: a vigorous rebound in private equity contrasting with malaise in real estate; a tailwind for private credit but a headwind for natural resources and infrastructure.

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It was a year of massive disruption—and private equity emerged unscathed.

Despite the tragic Covid-19 pandemic and its global economic fallout, despite the protests against police brutality and systemic racism and months of social upheaval, despite a bitterly contested US presidential election that ultimately led to an unprecedented mob assault on Capitol Hill, dealmakers kept making deals in 2020, while exits and fund-raising fell in line with robust five-year averages.

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Private markets complete an impressive decade of growth. Private market assets under management (AUM) grew by 10 percent in 2019, and $4 trillion in the past decade, an increase of 170 percent, while the number of active private equity (PE) firms has more than doubled and the number of US sponsor-backed companies has increased by 60 percent. Over that same period, global public market AUM has grown by roughly 100 percent, while the number of US publicly traded companies has stayed roughly flat (but is down nearly 40 percent since 2000).

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If 2018 was a year of divergence—acceleration in the US, deceleration in the eurozone and China—2019 saw economies slowing across the board. There is a growing expectation of a global recession in the near future. Beyond the trade wars and uncertainty around Brexit, a number of economic indicators are flashing red or yellow.

Some 57% of private equity fund general partners (GPs) surveyed by Preqin worldwide think the economy has reached a cyclical peak, while 14% think it has already entered a recession. They are also significantly more worried about geopolitical conditions than they were a year earlier. Overall, these concerns about market stability help explain why their No. 1 source of anxiety (70% of respondents) is overheated asset valuations.

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