With last year’s economic and political uncertainty in the UK, it came as quite a surprise that the Private Equity market exceeded all expectations for 2019. Director Simon Gordon recently highlighted his thoughts on Private Equity trends for the new decade, as he took the stage at the Real Deals Mid-Market Conference in London…
It’s worth noting that Private Equity had a strong finish to the decade – the latest figures from Preqin, for example, show that the alternatives industry set a new record in 2019, with global assets under management (AUM) surging to US$10.31tn.
Despite the sustained global political and market uncertainty that characterised the majority of the last decade, there is still a healthy amount of fundraising taking place as both covenants and interest rates remain favourable to borrowers for leveraged deals.
If this trend continues, the Private Equity market within the UK has the potential to build on the highly positive upward trajectory that marked the close of the decade.
SIMON’S KEY TRENDS FOR 2020:
SPECIALISATION IN FUTURE FUND STRATEGIES
With more investors looking for buyout targets, fund managers, such as those who are clients of JTC, possessing unique skill-sets and in-depth expertise are helping firms gain a competitive advantage, making them stand out to institutional investors.
It’s highly likely that fund managers will be concentrating on the implementation of specialist and tightly focused strategies for fundraising in 2020. As we move forward, having a highly regarded management company with particular expertise acting and advising on a structure could mean the difference between a successful or inconclusive funding round. Awareness of problems caused by poor and lacklustre fund managers has never been higher, as witnessed by problems in the retail sector with the ongoing Woodford saga. High quality representation in this area is now a prerequisite for investors.
Fund managers are adopting different strategies to compete internationally and participate in bigger rounds across the various financing stages. Implementing a strategy based on specialisation makes sense for funds looking to invest into start-ups and also participate in follow-on rounds. It provides fund managers with the opportunity to return to follow-on rounds to help start-ups stay afloat.
VENTURE CAPITAL (VC) EXPECTED TO MARK A NEW RECORD FOR THE DECADE
In 2019, European VC reached a record breaking high as deal sizes grew across the continent. This new peak has seen sources of capital flood into the European market.
In the VC space certain sectors, such as med tech and pharmaceutical, are particularly vibrant at the moment, with target firms attracting high multiples. Many of the larger pharmaceutical companies are outsourcing their research and development, and for that reason the value of this industry is growing.
In addition, larger asset managers, traditionally seen in the Private Equity space, are launching new funds to invest in venture assets. In particular we recently saw the successful Octopus venture growth fund close. They had already launched their EUR250m venture fund in 2018 but the new fund raised c.£100m to invest further into fintech, health tech and similar industries.
Many of these target companies are in the Nordic countries and mainland Europe. So, while the UK is still a huge focus for this industry, it’s apparent that there is now a focus elsewhere. We are also starting to see some of the larger Private Equity managers, where they are investing in this type of VC asset, set up significant operations in other countries in Europe.
It is apparent that the VC market is currently well placed to attract funding, with the following wind of lower interest rates coupled with a large cash overhang in the market. The acronym TINA has never been more appropriate; There Is No Alternative…
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) IS GAINING MORE PROMINENCE
ESG principles and framework requirements have risen dramatically over the past 18 months and the trajectory for funds under management seeking an ESG overlay are on an exponential growth path.
This global trend is being driven by many different but strongly correlated factors. The biggest and therefore most influential global investors are altering their priorities and placing ESG and the impact of investment strategies at the top of their agenda. There is also a greater corporate focus surrounding social responsibility which considers how funds are set up and what opportunities they offer.
It has also become increasingly noticeable that fund managers now own majority stakes in companies. With these higher levels of ownership comes correspondingly greater responsibility and they have to prove to their investors, plus the wider world, that, at every point of the value chain, ESG issues are prioritised, dealt with and fully reported.
The desirability and importance of ESG to investors and key decision makers has led to huge changes within fund administration. Fund administrators are having to adapt their technology to evolve towards more transparency and clarity in their financial reporting. Indeed, ESG reporting is an area that requires a step up from fund managers.
At this time, there are no truly distinct or pre-determined ESG reporting standards and one investor’s ESG exclusion is another’s top pick and bargain. Investors are looking forward to the time when ESG ratings can be as simple and easily understood as, for example, Credit Ratings – but the market has not yet developed such a readily identifiable system.
Recent years has seen a raft of regulatory changes, such as AIFMD, BEPS and more focus on economic substance in all the major Private Equity fund jurisdictions. Reporting standards introduced by organisations such as ILPA (Institutional Limited Partners Associations) have also had a positive impact on the industry and we are seeing an increased demand for this sort of reporting competency from investors. We are also seeing the beginnings of the use of blockchain to enable and support investments into Private Equity funds, which will cause a further shift.
In all cases, specialist fund administrators have the scale and the expertise to develop systems and processes quickly to adapt to these innovative changes. Looking ahead, it’s highly likely that, in this world of ever greater complexity and transparency, there will be a move towards further outsourcing, where managers today may choose not to carry out a particular administration function in house. As an administrator, it’s vital to work every day to stay one step ahead to best support clients.
At JTC we provide a full resource service in key areas of Private Equity. From advice on the most suitable structure, listing (if required), fund raising, acquiring and managing assets, with additional overlay reporting on areas such as ESG, through to advising on a full and final exit.
If you would like to find out more, please contact Simon directly.
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