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For the Alternative Investment Industry, Uncertainties and Opportunities Arise in COVID’s Wake

by | Jul 29, 2020 | Securities

Alternative Investment

As with the public markets, the alternative investment industry has been buffeted by uncertainty since the onset of the COVID-19 pandemic and the economic turmoil that has accompanied it. With the first half of the year now past, a clearer picture is emerging of the effect coronavirus-related shutdowns have had on alternative investment sectors like private equity, venture capital, and real estate.

Deal volume and investments, as might be expected, declined across alternative sectors in the first half of the year, particularly in the second quarter, when the full impact of the COVID-19 outbreak began to be felt. There are exceptions, however: late-stage venture capital investments rose, private equity firms turned to smaller and family-owned companies to replace large company investments, and institutional investors have been taking advantage of a decline in prices to buy up real estate securities.

What follows is a review of the state of affairs in the U.S. private equity, venture capital, and  real estate sectors gathered from industry analysts and data providers.


According to the National Association of Real Estate Investment Trusts (NAREIT), a

“large number of REITs have been able to access the capital markets in the second quarter, which included more total offerings than took place during the first quarter. While there were slightly fewer equity offerings over the past three months than during the winter, there were 40% more bond issues. There was one IPO among the equity offerings during the first quarter, but none during the second.”

Most REITs were in a strong financial position prior to the spread of coronavirus, having raised $440 billion in equity capital during the last decade and dramatically reducing their leverage to its lowest level in decades, according to NAREIT. Their access to capital has helped spur investor confidence in their ability to operate despite difficult economic and financial market conditions.

Overall, REITs have registered a relatively mild decline in rent receipts since the beginning of the crisis, in spite of concerns about lost income from distressed commercial real estate and apartment tenants. According to a survey of NAREIT members, receipts for shopping centers and retail rose by 10 percentage points in June as stay-at-home orders lifted in several states. Further, REITs in the industrial, apartment, office, and health care sectors have maintained collections of 95 percent of their typical receipts.

Though tenants are still paying their rents, the value of commercial real estate has taken a hit. Green Street’s Commercial Property Price Index reports an 11 percent decline in the aggregate value of U.S. real estate during the first half of the year. The Wall Street Journal noted in early July that malls and lodging properties have experienced a 25 percent drop in value during the previous three months. As a result, commercial sales listings have flagged as owners hold on to their properties to see if prices will recover. Real Capital Analytics indicated that during the first 150 days of 2020, commercial real estate deals had declined 33 percent year over year.

For some large investors, the tighter market has meant shifting their money into real estate securities. Some of the biggest investment firms in the country are betting that public markets have been, in the words of The Wall Street Journal, “too pessimistic about the pandemic’s impact on property owners.” They’ve purchased REIT shares and real estate bonds, looking for an opportunity to cash in as the market rises. Some investors have already made significant returns.

How long this will last will depend on the scale of the crisis moving forward. Defaults may still rise among tenants and highly leveraged investors. NAREIT said on July 13 that the rapid growth of new COVID cases in recent weeks, particularly in the Sun Belt, could again depress property valuations and REIT performance.


U.S. private equity activity slowed considerably during the first half of 2020 to levels similar to those during 2009 and 2010, when the country was grappling with the effects of the Great Recession.

Private equity deal makers did 2,173 deals totaling $326.7 billion during the first half of 2020, according to Pitchbook, which tracks private equity investments. This represents a 20 percent decline compared to the first half of 2019. A number of private equity deals have also been felled by material adverse change clauses, particularly in the second quarter.

Nevertheless, deal activity remained above the lowest points of the global financial crisis of 2009 and 2010. Private equity firms also got creative in the first half of the year, particularly with the use of private investment in public equity or PIPE deals and divestitures, to help them deploy capital. According to Pitchbook, “sponsor to-sponsor transactions, or secondary buyouts, have slumped to their lowest levels since 2009. Private equity firms are in triage mode, trying to determine which portfolio companies to save and how, rather than looking to sell.”

Smaller, family-owned businesses have risen in private equity buyers’ estimation as acquisition targets, because larger companies with institutional backers are less willing to sell in a depressed market. The median buyout size declined for the first time in five years, Pitchbook said in a July report on the private equity market, “and the share of non-institutionally backed companies as a proportion of buyouts rose to the highest [level] we have seen since 2009.”

VENTURE CAPITAL: A late-stage surge

Venture capital activity, while down in the first half of 2020, proved more resilient than many analysts expected at the outset of the COVID-19 pandemic. According to PwC’s MoneyTree Report, deal activity actually rose 3 percent in the second quarter of 2020 over the first quarter. Year over year, however, deals fell 18 percent. While the drop is significant, it is, as one analyst noted, “hardly apocalyptic.”

Fund-raising also remained active. U.S. venture-backed companies raised $26.9 billion in the second quarter of 2020, down less than 1 percent from the first quarter of the year. Funding and deal activity have declined 7 percent in the first quarter and 16 percent in the second quarter as compared to 2019.

Much of the activity has been at the top-end of the market. Bucking the down economy, VCs financed 69 mega-rounds, or financings of $100 million or more, a new record, according to PwC.

Venture capitalists have also been shoring up their later-stage investments against COVID-related economic turmoil, with late-stage deal counts rising above early-stage transactions in the second quarter. The Wall Street Journal, relying on numbers collected by Pitchbook, reported in mid-July that U.S. companies had raised $24.6 billion in the second quarter via late-stage financings. This is the highest total the late-stage market segment has collected since the record-setting fourth quarter of 2018.

Initial investments, on the other hand, are being made at a far slower pace. At $4.6 billion, second quarter deal activity closely resembles the Great Recession years of 2009 and 2010. Companies are also continuing to stay private longer, with VC-backed exits declining rapidly. The number of exits declined from 170 in the first quarter of 2020 to 144 in the second quarter, driven by a 22 percent drop in M&A.

While VC activity appeared to be picking up as the second quarter ended, the new wave of coronavirus cases in parts of the United States along with the retreat of states like California to shelter-in-place orders, may drive activity down once again.

KVCF will continue to monitor market conditions for our clients in the alternative investment sectors. Contact us to learn more about how we can assist private equity, real estate and venture capital investors.