MSCI: Buyout funds may be down as much as 20%

Current market volatility driven by the global spread of the coronavirus has been seen almost exclusively through the public markets, while the quarterly valuation of private equity fund funds results waits to be seen. MSCI's proprietary "nowcasting" model, which projects values of buyout funds based on current market conditions, estimates that funds could have been down more than 20% on March 23.

The finger points to highly leveraged portfolio companies with declining or non-existent revenues as yield spreads rocket and corporate sales data are expected to be dismal for the first quarter.

The model attempts to unsmooth the volatility, or lack thereof, created by quarterly results based on lagged asset valuations. The most recent valuations show that the observed funds were undervalued relative to their modeled valuations. Previous periods of market stress, the first and fourth quarters of 2018, saw relative overvaluations. Similar trends were seen during the global financial crisis, with reported fund valuations much higher than model projections with the balance shifting to significant underweights as public markets rebounded.

European buyout fund valuations show patterns close to their U.S. counterparts, but with less volatility in both the model projections and reported values. The dataset also showed reported values closer to model values.