What Moved
February 2020 began normally and ended in crisis. The alternative investments outlook shifted dramatically in the final days of the month. For most of February, Canadian markets continued their upward trend. The TSX reached all-time highs in the third week of February. Housing data remained strong. Private credit markets were functioning smoothly.
Then, in the final days of February, COVID-19 went global. Italy reported a surge in cases. Markets began pricing in pandemic risk. The TSX fell sharply in the last week of the month, giving back weeks of gains in days. The S&P 500 suffered its fastest correction in history — from all-time high to 10% decline in just six trading days (Reuters, Feb 2020).
The Bank of Canada had no scheduled decision in February, keeping the overnight rate at 1.75%. But by month-end, bond yields were plummeting as investors fled to safety, and rate cut expectations were surging.
Private markets, by their nature, didn't reprice in real time. MIC portfolios continued to generate distributions. PE fund valuations hadn't been marked down. But the underlying risk environment had changed dramatically in a matter of days.
What It Means
The February selloff marked the end of the longest bull market in history and the beginning of the most acute market dislocation since 2008.
For private market investors, the immediate implications were twofold. First, the illiquidity of private investments meant that portfolios didn't suffer the mark-to-market losses that public equity holders experienced. MIC investors didn't see their account values plunge 10% in a week. This is the illiquidity premium at work — in both directions. It smooths returns on the way down, just as it dampens them relative to public market rallies on the way up.
Second, the nature of the underlying risk was changing. If COVID-19 caused a severe economic contraction, private credit borrowers could face stress. Real estate development projects could stall. PE portfolio companies could see revenue declines. The private market calm was temporary — a function of lagged reporting, not immunity from economic reality.
For investors, the message was about liquidity management. Those with adequate cash reserves and long time horizons were better positioned than those who might need to access capital in the near term. Across Canadian alternative investments, the premium on manager quality and portfolio transparency was about to increase sharply.
What We're Watching
Everything. The pace of COVID-19 spread, government responses, central bank actions, and the economic impact were all moving faster than anyone expected.
An emergency BoC rate cut was increasingly likely in early March. Markets were pricing in 50 basis points or more of easing.
Private market managers' communication with investors would be an early test of manager quality. How transparently and quickly managers addressed the changing environment would signal their preparedness.
Closing
February 2020 will be remembered as the month everything changed. The optimism of January gave way to uncertainty by month-end. For private market investors, the lesson was already forming: the value of alternatives isn't that they avoid risk — it's that they experience it differently.
For the full quarterly analysis, see Q1 2020: When Everything Correlated.
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