Guest comment by Adam Palmer and Andrew Poole, ACA Group
The impact of recent lockdowns and subsequent economic upheaval is well documented. The current inflationary pressures and recessionary fears are casting shadows across the wider financial world. But as longer-term investors will tell you, some of the greatest opportunities arise in uncertainty or market dislocation. For emerging managers, this may be their moment.
Although it may seem incongruous, uncertainty often represents fertile ground for managers; a review of the larger macro picture hints at this. Fundraising in 2021 and into 2022 benefited from initial lockdowns, with overall fund sizes increasing in both private equity and private credit. Staggering in size, these commitments demonstrated the level of investor appetite.
While market sentiment remains strong and the push for further democratisation continues, many LPs are apparently running up against their own manager exposure limits. With most, if not all, of the established market participants having completed their flagship fundraises, LPs may need to diversify from a manager perspective, earmarking additional capital for new managers.
Appetite for specialisation also appears to be growing, with acquisition processes seeing specialist managers gaining the upper hand, providing more specific and attractive options.
Larger established managers have launched more sector-focused funds that broaden the scope of target companies rather than being restricted to larger-cap deals. In addition, there are signs that local knowledge and access is becoming key. With opportunities more competitive, knowing the local market may well be beneficial to the manager and thus to investors.
Loosening of restrictions
One of the great drivers for the emergence of new managers is regulatory change. The UK government has been extremely vocal about encouraging growth through private markets and being open to private investment.
Although proposed legislation does not create the self-regulating freedom some may have expected, certain elements such as Qualifying Asset Holding Companies offer potential tax incentives for UK structures and, potentially, UK managers. The LTAF structure, mirroring the EU ELTIF in many ways, may also provide options for new managers to differentiate, although take-up appears to be slow.
Proposed changes to Solvency II may also encourage new managers, should the envisioned loosening result in insurers seeking new opportunities. As noted, established managers have been fundraising recently. With investment periods locked in, LPs may be reluctant to grant approval for further raises. This, like opening private markets to retail investors, will likely necessitate additional investment vehicles from managers more minded to these types of investors.
Over the past few years the costs, timing and uncertainty of regulatory licensing and the subsequent on-going compliance burden have led to a raft of emerging firms sacrificing independence for the speed to market and efficiency offered by leveraging the licence of a regulatory hosting platform.
Platforms with strong governance, appropriate resources and effective risk management provide a valuable service. However, anticipated tightening may encourage some to consider direct licensing. The hosting sector is braced for greater accountability, increased regulatory reporting, potential business limitations and stringent monitoring of its clients.
Some of the resulting burden and bureaucracy will necessarily be pushed down to hosted firms, making the solution, for some, less attractive. Going it alone may then not seem so bad.
As reporting becomes more onerous, and ESG considerations further entrenched, newer, flexible, smaller and entrepreneurial managers may be the major beneficiaries of this uncertainty.
Adam Palmer is a partner and Andrew Poole a director of UK regulatory consulting at ACA Group, a London-based governance, compliance and risk adviser