If in 2020 governments and central banks had not intervened as they did, it would have been very easy to slip into a uncontrollable area, says Arin Ion, founding partner of the Black Sea Fund.
I have been working in investment for about 20 years, but last year was by far the most complicated, even though it ended much better than we would have expected in March – April.
The economic crisis, on top of the medical crisis, was something I had never experienced before and the year that passed was, in fact, three years in one. If in the first two months of the year, the medical crisis was just a 7,000 km away topic and business were running as usual, then we were hit by a wave of maximum uncertainty. I think the only time I ever witnessed the level of uncertainty we experienced between March and May of last year, was in October 2008. But last June the economy reopened, and we saw signs of recovery.
But what made the transition from a period of great uncertainty to a period of near normalcy was the unprecedented intervention of governments and central banks. Had they not intervened as they did, it would have been very easy to slip into an uncontrollable area. Central banks and governments, based on the experience they gained in the 2008 crisis, took very serious measures and pumped money into the economy. One way or another, people and companies have been helped, which brought things somewhat closer to normal, starting the second half of 2020.
To put things in context, over the past year, FED (the central bank of the United States) injected $ 2.7 trillion into the US economy through acquisitions of financial securities (government bonds, corporate bonds, etc.). The US Treasury (United States Department of the Treasury, part of the US Government) pumped about four billion dollars into the economy through credit schemes (loans) and grants. According to the estimates of the eminent American economist, Larry Summers, we have witnessed the most significant economic stimulus package, similar to the government commitments in the USA during World War II. If the economic stimulus and liquidity package injected during the Obama administration accounted for about half of the US financial loss during the 2008 crisis, the package injected into the economy in 2020 represented, according to Larry Summer’s estimate, almost six times the loss of economic activity generated by the Covid crisis in 2020. This explains, mostly, why the main index of the American market (S&P 500), after a fall of about 35% in February-March 2020, had a spectacular recovery of around 68% at the end of 2020 compared to the March lows (similar to many other markets and asset classes). This dynamic has been replicated in various world economies, on a smaller scale (especially in developed economies, where budgetary efforts are easy to finance), including in our country.
Had it not been for this powerful intervention of governments and central banks, the dramatic consequences are easy to imagine, as they would have been significantly more severe than the ones in 2008, given that in the second quarter of 2020, the US economy fell by 32.9 %. This is the largest decline in economic activity since 1928 when the Great Depression in the interwar period spread globally and lasted half a decade.
On this occasion, it was clear from the first signs of the pandemic that central banks would act much more vigorously, much more firmly than they had done in the past to support the economy. Central banks intervened quickly to ensure ample liquidity and low financing costs in financial markets through various levers, including acquisitions of riskier assets, which, not even during the 2008 crisis, did not have the political support to be included in their securities repurchase programs.
Moreover, the governments of some developed countries (USA, EU) quickly intervened with measures to provide liquidity to small and medium-sized enterprises (credit programs, guarantees, grants, deferral of taxes, etc.) and the population. In the US, the people not directly affected by the Covid-19 crisis were also helped. Basically, governments have supported those areas of the economy where central bank intervention levers were limited.
Our position, at the Black Sea Fund, was to find solutions to move forward for all the projects and all the transactions we had in progress. Not necessarily in the same formula or based on the same assessment of the transaction as prior to March, but we focused on finding a solution to move forward with the projects. We wanted to find methods, in terms of assessing and structuring transactions, aimed at managing the risks and uncertainty related to the financial performance of the companies in 2020.
Our vision was that one way or another, starting in 2021, things would recover. And the only significant transaction risk was the performance in 2020. We also made sure that the companies we were dealing with had liquidity resources to withstand the shock of a difficult financial year. We did not want to partner with companies that were very fragile and would be swept away by the crisis. In ordinary times, you don’t look that closely at liquidities. You focus more on the results of the previous two or three years, but in a year like 2020, we wanted to be sure that the companies had the resources necessary to make it through the crisis.
For Theta and DigiRay we found solutions so that the entrepreneurs not be penalized for the performance of 2020. We wanted to identify structures that would help entrepreneurs recover in 2021-2023, to gain through actions or sums of money what they lost in 2020.
Those who wanted to make transactions in 2020 made them. For example, in March last year, we chose to put a project on hold, but another fund had a vision bolder than ours. At that time, in March 2020, we truly wanted to step back to reflect and evaluate the project, but when we returned to discussions in June, it was too late.
The important thing, throughout this pandemic, was that both sides – the founders and ourselves – talk openly and find a constructive way to manage the times of uncertainty.
By Arin Ion, founding partner of the Black Sea Fund