David Lebovitz:  Welcome to The Center for Investment Excellence, a production of JP Morgan Asset Management. The Center for Investment Excellence is an audio podcast that provides educational insights across asset classes and investment themes.

Today’s episode is on private equities, and has been recorded for institutional and professional investors. I'm David Lebovitz, Global Market Strategist, and host of The Center for Investment Excellence. With me today is Larry Unrein, The Global Head of Private Equity at JP Morgan. Welcome to The Center For Investment Excellence.

Larry Unrein:  Thank you, David. Thanks for having us tonight.

David Lebovitz:  For listeners who missed our most recent episodes, all upcoming Center for Investment Excellence episodes, will focus on current market volatility, the impact on various asset classes, and how investors can best position themselves to withstand both current and future market conditions.

Today, we will be discussing private equity, exploring how COVID-19, the Fed’s recent rate cuts, and market volatility, are impacting the sector. Private equity has demonstrated an ability to outperform traditional asset classes over the long term, and the best way to go about investing within the space, is front of mind for many investors and clients.

So kicking it off here, Larry, we’d love to get a sense of what you were seeing across the private equity universe before the onset of COVID-19. In other words, as the calendar turned from 2019 to 2020, what were some of the trends that you were observing across the private equity space broadly?

Larry Unrein:  Yes, sure. From a calendar perspective, it's not that long ago, but as you can probably agree with, David, those things change quite a bit. When we typically get towards the end of the year in December, we like to do both a retrospective and an outlook.

And as we sort of ended 2019, coming into early 2020, in many cases, it was very much more of the same, in the sense that you had a lot of private equity activity. There was a lot of capital, a lot of equity capital in the private equity markets. There was an abundance of debt that was available. It was also available on very, very good terms.

If you looked at valuation multiples, they clearly were at the higher end. You put that in the context of very strong capital markets, pretty much anywhere you look across the board, I mean you had very strong equity markets around the world. You had higher credit spreads, and record levels of tightness. So it was very much more the same.

And then the underlying business trends, were also very, very good and very, very strong. Then if I could, a little bit in January 2020, we clearly were paying a lot of attention to China, and our portfolio of exposures there. And we were almost getting our arms around the suddenness of change.

We roll ahead to today, and in many respects, I think almost everything that we were focused on and looked at in December and over January, is pretty much off the table now because you have this almost unprecedented government declaration of reduction of large scale of economic activity.

And businesses, no matter how well managed they are, or how much they plan, are certainly hard to plan around essentially all of your revenue just stopping. So we're very much in unprecedented situation as we look out going forward.

David Lebovitz:  I want to come back and revisit that topic of, what might be in store for private equity over the next couple of quarters, and how you're thinking about what the economic impact may look like broadly and at the industry level, if you have that insight?

But you mentioned China in your opening remarks, and I can confirm that China was a hot topic in a lot of my client conversations kind of going into the end of last year, and the beginning of this year for sure, as COVID, you know, escalated in that part of the world first.

What are your thoughts around how this current crisis will impact, not only the growth that we were seeing in terms of investor interest, in having China from a private market perspective, but how you think that asset class may evolve going forward, and what some of the opportunities may look like from your vantage point?

Larry Unrein:  We have also been spending, as you would imagine, a lot of time looking at our investments in China, talking with different parts of our network about activities in China, looking at different businesses. Spent a lot of time last week on the phone with our on the ground joint venture partner in Beijing, and a number of things.

I think clearly activity is starting. It’s not normal, but it’s starting very much to move back to normal slowly, constructively. There’s even discussion that I think the last report I read, there was no new cases in Wuhan for at least the last five days (inaudible) anticipation in early April, but assuming that continues, that they’ll move back.

And I think Beijing it’s been over two weeks now where essentially there’s been no new cases. And if you look at traffic patterns around Beijing, it's not normal, but it’s kind of what looks like during a heavy vacation period.

I think there are a couple of things to say for that. I do think they decided to take a big economic hit in the first few months in the first quarter. Expected that will recover. An insight that somebody gave me, who was comparing this to SARS, and I don’t see any reason to really challenge that, which was that we would expect that the percentage growth will not be as significant as what we saw back in ’04, largely because you're dealing with a much bigger denominator in terms of the overall economy.

I think the other thing where there maybe is the real opportunity in the private side is - and I think you might see this not only in China, but in other parts of the world, which is look, there are going to be real changes as a result of this, I think.

And you think about little things that changing - certainly after 911 we saw real changes. And for those who weren’t around, believe it or not, you used to be able to walk into an airport and get on a plane. Now in the US alone, they have the TSA, which is hundreds of thousands of people. You used to be able to walk into an office building.

Security and changes around that were big and structural, but I wouldn't be surprised if for a period of time, we see real changes in persistent behavior on the part of consumers, which will favor even more some of the online activities that were somewhat imposed here during some of the quarantine activities.

So I think that that's an area, but I also think how people think about them and behave, will also create some real changes, and maybe some opportunities.

David Lebovitz:  I couldn’t agree more. I think one of the underappreciated elements of this whole thing is, what does it mean for human behavior going forward? And, a lot of the sale side community is talking about this V-shaped or this U-shape bounce back in economic activity.

I mean, and generally, this is a temporary pause for the global economy, but you do have to ask yourself, does consumer behavior change in a way that it alters the trajectory of the recovery perhaps more meaningful than what folks are currently pricing in?

And that actually brings me to my next question here. We look ahead here over the next couple of quarters. We think that we’re in store for a relatively deep, but hopefully fairly short contraction in the global economy. Earnings are under pressure. We’ve marked down our earnings forecast this year to show contraction. Valuations have re-rated.

What do you think this means for private equity as an asset class, both in the medium term and the longer term? I mean, do you see value being created? And then additionally, how does the election fit into this whole dynamic? Would love your thoughts on how things may evolve from this point going forward.

Larry Unrein:  Yes. I think from a private equity perspective, the - I would agree, you have a point, which is, we are going to see - obviously we’re seeing a very sudden downturn and decline. The extent and duration of that will have a lot of impact on how and when it recovers.

But from a private equity investor's perspective, I would sense that the point I alluded to, there will certainly be economic damage inflicted. Again, companies are now faced with - particularly in certain sectors, revenue scenario that they just no way could have adequately planned for.

But I also think - we've been in business at JP Morgan, and I’m talking about myself, quite a few number of the team, since the late 1990s. And we saw the tech bubble in ’99, 2000. We saw 9/11. We saw the subsequent credit issues and recession. We saw the buildup in ’06 and ’07, and then the unwind in ’08 and ’09.

And again, there are differences, but there are some similarities. And I really would expect that there’s going to be some very attractive opportunities to make investments. And I actually think the kind of investment opportunities that we’re really focused on, and I don’t have clarity yet on exactly - although I have some areas that we are really looking at as potential sources of opportunity, particularly where leverage and other opportunities create real pressures for folks.

But I think that there’s going to be some real opportunities to make very compelling investments. And I go back to the ’08 and ’09 period, and we took advantage of some of these illiquidity. What was interesting at the time, and I think this will hold true, at least initially too, is that we were able to make some really attractive investments and to take advantage of people who had real liquidity issues and liquidity concerns.

But we were able to make those investments and underwrite that the world that excited back in ’08 and ’09, would continue, and those investments would still be in practice. It’s important for me to also focus on the risk side of it, particularly in Italy, because I don't sense a real need - I think you can get private equity returns without necessarily taking a lot of risk.

And I think initially, what you don't want to have to do, is make some great heroic assumptions about what the world was going to look like in six or nine or 12 or 24 months. And I think that’s potentially the real sort of opportunity.

I kind of avoid, in both my sort of personal and professional life, talking about politics, because that doesn’t really lead to very much. But there’s obviously a lot of division, and has been in the US for a number of years.

This is the period where I think it requires unity and focus. And just looking at the last number of days at some of the rhetoric going back and forth, some of these industries, they didn’t (inaudible) and all of a sudden, they had no customers.

And I think we’re in unprecedented time, but I certainly do think that elections do and have consequences, and whether there is a change that’s either pro or anti-business on the margin, will certainly impact, not only our business, but returns and economic activity across the US spectrum.

David Lebovitz:  Absolutely. I share your view on discussing politics. To me, it’s much more about policies and the policy fix themselves, right, because policy actually has an impact on the investment landscape over time. So maybe just one final question here to kind of tie everything together.

You mentioned that you think that there’s some opportunity being created, and you try to avoid making heroic assumptions as to the way the world is going to look on a forward basis. How are you thinking about allocating to different parts of the private equity market going forward? Are you going to be leaning more into the primary space? Do you think that there's opportunity in secondaries?

And kind of the follow on is, how should investors think about allocating the private equity, if they’re existing investors, or if they're perhaps a bit new to the space? So, you know, and kind of summarize that, where do you think you’re going to be finding the most opportunity going forward? And then how can investors think about establishing either new positions or existing positions, given what lies ahead?

Larry Unrein:  An important thing to note about say private equity versus public equity investment, and David, you’re very aware of public markets. But when you look at - and I’ll use our own company, JP Morgan.

When you look at the share of stock at JP Morgan, it’s moved from about 140 to 80 and all around in the last number of weeks, right, which is a really significant move, but I don't think that that reflects what the overall value of the business is, right?

I think if you knocked on the door and said to the board of directors of the company, I want to find the business for (inaudible) 100, they're not going to really take that very seriously. So we’d expect a lot of normal private equity activities to slow here, because there'll be a big bid ask spread.

So if you have a good business, you're probably not going to sell it in an environment when multiples and valuations are lower. And I certainly expect to see multiples and valuations be lower. I also think that that financing is likely to be harder to get. And if it available, it will be available in lesser amounts and with more stringent terms.

So I think that in the near term, the activities are going to be around places with liquidity, whether those are positions, and we have some real clear and very strong views about opportunities, particularly for people who are in bad circumstances from a liquidity perspective.

I also think, if you look at individual businesses, that might be really, really good businesses, and there might be an opportunity. So I think those are going to be the areas. So it’s going to be very investment specific, as opposed to like sort of natural. But I do really do think that we're going to see some really good opportunities here, and we’re very much focused on it.

And, you know, I think from investors perspective, I think that there's a tendency for investors sometimes to be concerned about liquidity or allocation percentages and other things, but I really believe and our history over time has been that in periods like this, it tends to be some of the best opportunities that present themselves.

So whether you're new or existing, I think you should be open to some coming opportunities, because I really do believe that you will be rewarded, and I think you can find good return at very attractive levels of risk over the next number of months.

David Lebovitz:  Excellent. Larry, this was absolutely fantastic. Thank you so much for joining us on The Center for Investment Excellence.

Larry Unrein:  Thanks a lot.

David Lebovitz:  Thank you for joining us today on JP Morgan’s Center for Investment Excellence. CFA institute members are encouraged to self-document their continuing professional development activities in their online CE tracker. If you found our insights useful, you can find more episodes anywhere you listen to podcasts, and on our website. Recorded on March 25, 2020.

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