KKR Sees “The New Normal”

KKR has released a new report titled “The New Normal” which explores the long-term implications of COVID-19 on cities and consumer trends.

“Following a decade of relative prosperity, overlapping calamities in 2020 have brought economic activity to a near halt. The combination of longstanding political and social strife has met with an unforeseen health and economic crisis, which together have dealt a debilitating blow,” said Paula Campbell Roberts, the author of the report and a director at KKR. “As investors, some of the core questions with which we are wrestling surround future economic growth, the fate of our cities, shifts in the nature of work, and changes in consumer behavior that may persist post-COVID.”

In “The New Normal”, Ms. Roberts outlines long-term secular investment themes that she believes will gain momentum – those that reduce cost, increase convenience, and improve quality of life, health, and well-being.

Major points of the report include:

  • Dispersion: The locus of economic activity should disperse among multiple metropolitan nodes beyond gateway cities. Ms. Roberts affirms her pre-COVID conviction around Sunbelt migration as well as the above-average growth of medium-sized cities. Consumer spending should benefit. She believes that in real estate, multifamily, industrial and innovation offices are secular winners. Retail and older office spaces in larger central business districts are short-term losers. Gateway cities will face headwinds in the short term, but long-term budget reconciliation serves as a foundation for rebirth.
  • Essentialism: In the context of in-person gatherings, essentialism should thrive. Specifically, Ms. Roberts expects in-person meetings to take place only when safe, necessary, or highly valued. Essentialism has implications for a broad range of industries including healthcare (telehealth), personal care, retail, entertainment (online), travel (less business travel, more domestic leisure travel), apparel (casual) and real estate (single family rentals and purchases, industrial, HVAC/filtration upgrades).
  • Bifurcation: Amid slower consumer spending growth, structural underemployment, and a focus on value and convenience, Ms. Roberts believes consumers will likely consolidate their commodity spend among large retailers who have omni-channel service and delivery capabilities and are able to offer competitive pricing. She also sees tailwinds supporting smaller manufacturers with differentiated products that are difficult to find elsewhere, particularly as larger brands scale back on SKUs. These could include goods with a specific health, ESG, ethnic or cultural significance. She believes losers are mid-sized retailers or manufacturers lacking a differentiated value proposition, product, or service experience.

“We must be cautious when extrapolating current trends as determinants of future behavior, as the pandemic is ongoing. In our view, we have simply settled on a new crisis normal, and this phase will persist until we have a vaccine, effective treatment, or herd immunity. Estimates are that we are unlikely to achieve herd immunity until the end of 2021,” writes Ms. Roberts.

“In the environment we envision, the trends that will gain momentum will likely be those that reduce cost, increase convenience and improve quality of life, health and well-being,” concludes Ms. Roberts. “Against a backdrop of heightened volatility that will surely persist amid virus uncertainty, the high likelihood of a disputed election, and underemployment, investors should identify and lean in to long-term secular themes.”

KKR (NYSE: KKR) makes private equity, fixed income, and other investments in companies in North America, Europe, Asia, and the Middle East. KKR was founded in 1976 and in addition to its New York headquarters has offices in 19 cities around the world.

To download a PDF version of “The New Normal” click HERE.

Private Equity Professional | September 30, 2020

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