Our Approach to Recent Valuations and Response to COVID-19
The impact of the global COVID-19 pandemic is slowly unfolding as governments and industries around the world strap in and prepare for the long haul. While the public markets have reacted in a highly volatile way in the past month, the private equity market did not experience the same degree of volatility that magnified and propagated throughout the public markets.
During the past three years, Kensington has been reducing leverage where possible and building cash reserves in anticipation of an economic slowdown. Of course, we didn’t anticipate an economic downturn of this magnitude, but we consider ourselves well-positioned since all our funds have ample cash reserves. For example, the Kensington Private Equity Fund (KPEF) has indirect undrawn capital across the entire fund portfolio of $11 billion. KPEF’s share of that is $186 million, and the liquid reserves in KPEF alone are over $80 million. We anticipate an increase in the liquid reserves as committed sales and refinancings close in the coming months.
The work on valuations has been and continues to be challenging because it is very difficult to anticipate the pace of economic recovery. At Kensington, we are taking a more conservative and cautious approach. In the period ending March 31, we saw a significant amount of change in the portfolio as companies in hospitality and travel-related businesses experience revenue collapse, while companies in the food and logistics fields are working overtime to keep up with demand. In aggregate, 30 companies were written up in value and 40 were written down, resulting in virtually no change in the NAV of the Fund.
To enhance the diversification, the portfolio deploys half of the Fund’s capital in other private equity and venture capital funds. In the most recent March NAV, the portion of the Fund invested in other funds largely reflected December valuations as those funds are just now reporting their annual audited financial statements. Any material changes since December 31 are reflected in the March numbers. In the meantime, we have been in regular contact with all the GPs in our portfolios and have a good understanding of their fund activities as well as capital call expectations.
In the short-term, we are focusing on ensuring companies in our portfolio have adequate liquidity to be able to function for 18–24 months in very difficult economic conditions with workplace health and safety being our top priority. In the long-term, there will be opportunities to expand businesses, acquire assets and companies at highly attractive prices. We are always looking out for those deals and continue to work with our GPs and company management teams to ensure we’ve got a good view of the market.
We are confident that being well-capitalized, and well-diversified, Kensington is in a good position to thrive as the world recovers from this massive economic shock. We have invested in high-quality assets and our experience throughout the past 25-years has proven that quality counts.
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