At the cusp of possibly the most significant market drawdown and economic shock we've seen since the financial crisis, MGP looks at market impact paradigms to assess basal market impact of such events. And while current private equity war chests are well equipped to help alleviate pressures enabled by some rationalization of deal multiples in the wake of current turbulence, it also faces a major risk if these events lead to genuine economic deterioration.

1. Maple Growth Partners
COVID-19 Pandemic: Market Impact Paradigms
3rd April 2020
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NIRAJ SINGHVI
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niraj.singhvi@maplegrowthpartners.com
At the cusp of possibly the most significant market drawdown and economic shock we've seen since
the financial crisis, MGP looks at market impact paradigms to assess basal market impact of such
events. And while current private equity war chests are well equipped to help alleviate pressures
enabled by some rationalization of deal multiples in the wake of current turbulence, it also faces a
major risk if these events lead to genuine economic deterioration.

2. (60.0)
(40.0)
(20.0)
0.0
20.0
40.0
60.0
(6.0)
(4.0)
(2.0)
0.0
2.0
4.0
6.0
S&P500yoy%return
RealGDPyoy%Chg
0
200
400
600
800
1000
0
1,000
2,000
3,000
4,000
5,000
DealValue($B)
DealVolume
Deals Value
Sharp Public Market Downturns Herald Periods of Economic Slowdown Whose Impact
Equally Extends to Private Markets
S&P500 Returns, Real GDP Growth and US M&A Activity (Volume & Value), Quarterly, 1990 - 2019
“Denominator effect” - when a drop in public markets makes an investor’s private-market holdings appear overweight compared with the rest of the portfolio driving them to slow
or even halt new private-market investments to help rebalance holdings.
Source: US Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; Institute for Mergers, Acquisitions
and Alliances (IMAA)
Real GDP ChgS&P500 Return
The1990 oil price shock, debt accumulation of the
1980s, and growing consumer pessimism
combined with the weakened economy to produce
a brief recession.
Recessions in the last three decades show that we typically see lags between public market valuation meltdowns and a corresponding mark-to-
market/model adjustment driven slowdown in private market investments. A drop-off in the stock prices may or may not have a ripple effect on
private equity depending on the underlying driver of that move, but a decline in the earnings profiles of those companies certainly poses risk to
private equity as portfolio companies aren't immune to the negative economic pressures that public companies face.
Brought on by the collapse of the speculative dot-
com bubble, a fall in business outlays and
investments, and the 9/11 attacks. Despite these
major shocks, the recession was brief and shallow.
Subprime mortgage crisis led US housing bubble
collapse led to a global financial crisis, even as oil
and food prices soared. The crisis led to the failure
or collapse of many major US financial institutions:
1 2 3
1 2 3
Lasted: 8m; Time since last recession:
7y8m; Peak unemployment: 7.8%; GDP
decline (P-T): 1.4%
Lasted: 8m; Time since last recession:
10y; Peak unemployment: 6.3%; GDP
decline (P-T): 0.3%
Lasted: 1y6m; Time since last recession:
6y1m; Peak unemployment: 10.0%; GDP
decline (P-T): 5.1%
Denominator effect

3. Limited Success in Combating the Current Pandemic Suggests A Potentially More Severe
Downturn Than in the Past
Impact of Past Disease Outbreaks on Aviation (SAARS,
Avian Flu, MERS)
Source: IATA Economics using data from IATA Statistics; Refinitiv Datastream
Global Airlines Share Performance Comparison Amidst
SAARS and COVID-19
Looking at the aviation sector (usually the most vulnerable to similar outbreak driven economic stresses) in those regions where impact was
most severe reveals that the impact of previous disease outbreaks have peaked after 1-3 months and recovered pre-outbreak levels in another
6-7 months. That being said, financial markets are now anticipating a very large fall in airline profits globally, far beyond SARS impact which
might be indicative of how “this time is” truly “different.”
During the SARS outbreak China experienced a sharp dip in economic activity. Per Rabobank, monthly growth dropped from roughly 10% (y-o-y) early 2003 to 6.6% at the peak of the SARS
crisis. Land, water and rail travelling dropped by 50% (y-o-y), freight volume dropped by 15% (y-o-y). The tourist sector also took a hit. However, the economy rebounded quite quickly after
the outbreak was contained, making up for previous losses. This underlines that the SARS epidemic did not have any negative impact on production capacity.
Side Note: Back in 2003, a SARS vaccine was developed but was never used since public health measures got the disease under control by May 2003 before the
vaccine was ready. Since that time, Harvard scientists have found the antibodies which block SARS and MERS from entering human cells, which were used to develop
antibody therapies (which are different from vaccines, which are the treatment of choice and much cheaper to produce). The new COVID-19 virus shares 86% genetic
similarity with SARS, so scientists aren’t starting from ground zero.

4. Burgeoning PE War Chests Well Positioned To Benefit From COVID-19 Bear Market
US Private Equity “Dry Powder” Cash Reserves ($
trillion) and Capital Raises ($ billion), 2010-2019
0
2
4
6
8
10
12
14
16
18
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
DealVolume(‘000)
EV/EBITDAMultipleBucketShare
<7x 7x-9x 9x-11x >11x Deal Voulume
US Buyout Deals Average EV/EBITDA Multiple Bucket
Share and Deal Volume, 2010-2019
0.66 0.65 0.62
0.71 0.73
0.78
0.88
1.13
1.30
1.45
59
79
101
164
174 152
224
242
198
301
0
50
100
150
200
250
300
350
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
USPEFundRaising($billion)
USPECashReserves($trillion)
Cash Reserves Fundraising
Source: Prequin; Pitchbook; Bain & Co (Thomson LPC data); WSJ; Bloomberg
Low interest rates, the rise of index-tracking funds and years of lackluster hedge fund performance have pushed investors to private equity in
search of higher returns. Many firms opted to accumulate those assets as valuations soared and competition for deals grew. This puts many PE
firms in a unique position to capitalize on the COVID-19 bear market and deploy at more reasonable valuations that seen in the 4+ years.
There is also good precedent for the rewards of deploying during a crisis, during the 2007-09 financial crisis, investors that pulled back on
private-market commitments missed out on some of the best-performing funds - buyout funds from vintage 2008 and 2009 had median net
internal rates of return of 13.4% and 14%, respectively, higher than the three previous years.
^2.2x
19.8% CAGR
PE funds (with mega-funds >$5 billion –
Blackstone, KKR making up a major chunk)
are also raising at levels not seen since
2007 just before the housing crisis hit.
PE firms amassed
massive war chests -
$1.5 trillion in unspent
capital, a record.
1
1
2
2
15% 59%
Deal multiples >11x have
increased to 59% of buyout
deals in stark contrast to
15% post 2008 crisis
3
3
4
Rich valuations and higher stakes has
caused many PE firms to step back in
the last two years evidenced by the
reducing transaction volume since 2018.
4