With the COVID-19 pandemic continuing to impact global markets, we would like to share an update regarding Northleaf’s response to the crisis, the impact we anticipate it will have on our private markets investment portfolios and our perspective on the investment opportunities that may arise from the disruption it has caused.
Following a comprehensive review and analysis, we believe that our private equity, private credit and infrastructure portfolios are well-positioned to withstand the long-term impact of the crisis. We have made investments in a diversified portfolio of mid-market private companies and essential assets with fundamentally sound business models and a sustainable reason to exist. Across our platform, we also have more than US$2 billion of “dry powder” available to support existing investments and take advantage of compelling new investment opportunities resulting from the market dislocation and eventual recovery.
Northleaf’s response to the COVID-19 crisis has been swift and effective
- Our business continuity plan (BCP) remains in effect and every member of our 140-person team across seven global offices is working remotely;
- We set up a core working group that acts as the firm’s “nerve centre” to oversee all aspects of our response to the crisis;
- We increased the frequency and focus of our communications across the team;
- We enhanced our standard processes, procedures and controls;
- We have continued to recruit and virtually onboard new team members; and
- We have been operating seamlessly in this environment.
Impact on investment portfolios
The ramifications of the economic shutdown caused by COVID-19 will be far-reaching and will take time to unfold. At present, that outcome remains uncertain. However, Northleaf began 2020 with strong fund performance generated by our conservatively positioned portfolios. Across our global mid-market investment platform, we have:
- Consistently pursued a conservative strategy and prudent approach to portfolio construction;
- Focused on assets with predictable cashflows and stable business models;
- Invested in higher quality, less cyclical businesses, resulting in limited exposure to industry sectors most vulnerable to the impact of the COVID-19 pandemic; and
- Used leverage conservatively, which is providing a margin of safety in the current environment.
At the onset of the crisis, our investment teams, together with our Portfolio Strategy & Analytics team, senior advisers and operating partners, acted quickly to identify potential impacts of the pandemic on our portfolios. We addressed the near-term challenges, with a focus on sectors, regions and types of companies that were expected to be immediately impacted by the shutdown.
After the initial assessment, our investment teams conducted a more thorough examination in order to establish a short list of individual “watchlist” assets across our portfolios. This analysis included a detailed assessment of the portfolio companies’ cash needs and in-depth discussions with management teams and investment partners. We identified investments facing the most acute challenges and implemented clear action plans to mitigate their impact.
In addition, we conducted stress tests using a variety of downside scenarios on an investment-by-investment basis. This enabled us to quantify near-term cash needs, evaluate all potential sources of capital and earmark reserves to support existing investments if needed. Our investment teams are actively monitoring each “watchlist” company and are continuing to reevaluate and refine our analysis as new information becomes available.
Our integrated global investment platform and exclusive focus on mid-market private assets means that we have been insulated from the short-term volatility of the public markets and have been able to stay focused on generating long-term value.
As a private markets specialist with a stable, patient and well-funded investor base, we have the capital to both defend and support our existing investments and take measured and prudent advantage of the investment opportunities that will arise out of this crisis. Confident in our current portfolios – and our ability to play ‘defence’ throughout a protracted shutdown and prolonged recovery scenario – we are now turning our attention to ‘offence’. We are actively looking at new opportunities, including the potential to source quality assets from motivated sellers facing liquidity challenges.
We firmly believe that maintaining consistent allocations and exposure to private assets through market cycles will deliver strong returns. This is particularly true in periods characterized by market dislocation and volatility, which can lead to attractive valuations and investment opportunities for patient investors with available capital. Northleaf is well-placed to take advantage of what are expected to be excellent vintage years in the wake of the COVID-19 induced economic crisis, with the potential to generate strong returns through disciplined, selective investments in private markets transactions globally.
As always, we value the trust and confidence that our investors and their beneficiaries place in us and we work vigilantly to be responsible stewards of capital. This remains a challenging and complex environment, and we are available to share our insights and perspectives at any time.