Given the current economic uncertainty due to COVID-19, many investors are concerned about the impact it will have on their private markets portfolios. This potential volatility can be measured in various ways; however, most investors are focused on an industry impact of COVID-19, to evaluate that volatility.

Industry Impact of COVID-19 Classifications

Limited Partners can develop a classification system for identifying the potential impact of COVID-19 on various industries, as defined through GICS classifications. This classification system can be as simple as “positive impact”, “no impact”, “mild impact” and “high impact” based on an LPs expectations for the industry as seen through GP insights, public market performance and historic performance. See below for an example of how you can designate industries impacted by COVID-19:

Applying Classifications to Your Portfolio

Apply your impact classifications to your portfolio to understand current exposure and risk to COVID-19. An example of this application is shown below. When running this analysis, don’t forget that your current back office system might already capture the industry-level exposure of your investments. Additionally, leveraging a front office technology platform, like Cobalt LP, can simplify this analysis:

• Quickly upload the GICS classifications to analyze by industry
• Group and filter the portfolio to see the extent of COVID-19’s impact
• Within Cobalt, users can also upload a custom COVID-19 attribute for further analysis

• Understand how a general partner has historically allocated funds in the fund family across industries
• Apply the COVID-19 impact to these industries to understand how a new fund could be impacted
• Use the Cobalt Expert dataset to quickly view an entire fund family and its industry exposure
• Determine if these impacted industries are the biggest drivers of return in the fund

Sample Application

In the sample portfolio below, we determined the projected impact of COVID-19 on the underlying funds. Given the size of the portfolio, we chose to focus on the 10 largest funds, defined as the percentage of the fund’s NAV relative to the total portfolio’s NAV. We also identified the industry impact of these funds and ranked them in four categories: “no impact”, “mild impact”, “high impact” and “positive impact”.

In looking at the portfolio, we can see that the industry exposure is concentrated in the no- to mild-impact range. For the top 10 funds by NAV weighting, over 4% have significant exposure to COVID-19.

We can also run a similar analysis on the portfolio by looking at the unfunded commitment amount by GP:

By grouping by GP, we can see that the portfolio has limited concentration risk by unfunded commitment. In other words, no single manager accounts for more than 10.6% of the total portfolio. Furthermore, we can see that the GPs are well diversified by target strategy and sector. In fact, GP “C” employs a strategy that is well positioned to invest in dislocated markets given its specialization in distressed transactions.

Closing Thoughts

While the potential economic impact of COVID-19 remains unknown, LPs can leverage resources to better understand their current portfolio and plan for future commitments. By assessing the industries’ impact on their portfolio, LPs can be better equipped to understand their total exposure and how this relates to the broader portfolio. Furthermore, investors can apply these classifications to potential new investments to understand areas of opportunity in the markets.

To access Hamilton Lane’s industry-impact classifications or to learn more about how Cobalt LP can assist in this analysis, reach out to us.