Northleaf: Move to private markets is a ‘structural shift’

Concerns over inflation and public market volatility play into the hands of private markets investors, says Northleaf Capital Partners managing partner Stuart Waugh.

How material an impact will covid have on private markets over the next few years?

Stuart Waugh
Stuart Waugh

These are long-term asset classes, so it doesn’t make sense to overly focus on transitory factors. The biggest long-term structural shift we see is from public markets to private markets, which has been gathering steam for over a decade and which I believe will continue. Alongside that broad tectonic shift, there are other fundamental factors we believe will drive sustained interest in the three asset classes where we operate – private equity, private credit and infrastructure.

Short-termism and volatility in the public markets will keep encouraging investors to look hard at the long-term value creation possibilities in private equity. Concerns around inflation are only going to increase demand for defensive and less correlated infrastructure assets. And, in addition to premium spreads, the ability to hedge out exposure to rising rates makes floating rate credit investments extremely attractive as well.

Which areas of your business do you expect to be most impacted by technology investment?

We have an interesting vantage point due to our multi-asset class platform, which includes an active venture capital and fintech investment portfolio. That enables us to get an early look at emerging technology being used in other financial services sectors. Because there is no question that technology will play an increasingly important role, particularly on the operational side. There has been a proliferation of productivity applications and workflow management tools. Small process features like secure digital signatures have proved particularly critical in an era of remote working.

But the really impactful change I anticipate is around fundraising – both for underlying companies seeking financing and for fund managers raising capital. A combination of the availability of technology – including user-friendly apps for subscriptions and AML processes, and the increased user adoption of video conferencing and remote collaboration tools that working from home has forced on us all – will have a lasting effect. There will be a lot less travel and more reliance on digital diligence processes that will ultimately lead to a significant shift in the whole fundraising mindset and approach.

Will an increasing reliance on technology impact your approach to outsourcing?

I think technology will enable more flexibility in the operating model. The key to a successful outsourced relationship is data transparency and accountability. Technology enables that. I anticipate we will continue to use a mix of third-party administrators for specific functions, while using an internal team to oversee those relationships, all supported by more robust data sharing. All firms will need to find their own balance of internal capabilities and third-party partnerships, but overall, the working model will be more flexible, enabling a more bespoke approach to doing business.

To what extent have you brought automation to ESG?

Anything multi-faceted like ESG will need to remain qualitative to some degree. Judgment needs to be applied. But there are ways to enhance your ability to apply ESG considerations from both a business process and technology perspective. We have a central, senior-level ESG committee that shares best practices and strategic initiatives across our asset classes.

Then layered on top of that, we employ information processing tools that focus on ESG risks, as well as a platform that allows us to apply and evaluate climate science and related risks and opportunities.

So, while I don’t ever see ESG becoming fully automated, I do see technology tools making manual research, evaluation and scenario analysis more efficient and more effective.