Fund Leaders Survey 2022

The past two decades have seen record-low interest rates and quantitative easing that culminated in unprecedented financial support through the pandemic. Now, monetary policy is spinning into reverse as inflation – triggered by widespread supply/demand imbalances and the ‘Great Resignation’ – has spiralled.

It was against this uncertain, challenging backdrop that affiliate title Private Funds CFO carried out the Private Funds Leaders Survey 2022, conducted in partnership with MUFG Investor Services, in February and March.

Since the survey took place, war in Ukraine has further exacerbated the situation, slowing growth and bringing pervasive volatility. Private funds leaders are not easily cowed, however, and are proactively addressing the way they invest and support their portfolio companies, as well as the way they manage their own operations in these turbulent times.

Despite the geopolitical and macroeconomic backdrop, private markets leaders remain broadly optimistic about their operating environment, with almost two-thirds describing themselves as either very positive or positive about the outlook for the next 12 months. However, this does represent a decline in confidence from just under 80 percent in 2021. Meanwhile, the percentage describing themselves as negative has tripled to 10 percent.

Private debt remains strikingly popular, however, emerging for the second year running as the most popular option for fund managers who are looking to launch a new fund with a different strategy to their heritage.

That comes as no surprise to Dan McNamara, chief strategy officer at MUFG Investor Services: “We predict managers should expect to see returns upwards of the high single digits and high growth levels in the private debt market over the next five years, especially in Asia,” he says.

Treabhor Mac Eochaidh, head of debt services at MUFG, agrees: “Loans in general will perform very well in a higher interest rate environment because they are tracked to floating reference rates,” he says. “We are increasingly seeing managers that have historically focused on equities looking to incorporate a debt element, precisely because the premium for direct lenders is the interest, rather than the valuation of the asset itself.”

Here are six of the report’s most significant charts.

Inflation fears

Almost two-thirds of survey respondents identified inflation as the economic or political factor that will have the biggest impact on private markets over the next 12 months, compared with just 27 percent a year ago. The associated rise in interest rates was the next most commonly cited concern, followed by stock market volatility. Quantitative tightening is a distant memory for the majority of private markets participants, and CFOs are digging out their old tool kits.

Pricing power

Talent management is still seen as the most powerful operational lever at a portfolio company level. Retaining staff has become an absolute priority in the face of an incredibly tight labour market. Meanwhile, inflation means pricing strategies have also become increasingly important, as firms dig deep into data to ensure they know how much of their rising costs they can pass onto customers and where breaking points lie.

The ESG divide

The overwhelming majority of respondents continue to believe that a stronger ESG vision and culture will create value in their business – there are no signs that economic challenges will see ESG ambitions falter. However, clear distinctions remain around the globe. While 58 percent of European private funds leaders and 56 percent of Asian private fund leaders exhibit strong belief in the business benefits of ESG, this plunges to 22 percent for North America.

Keeping track

There has been a significant increase in the depth and breadth of ESG KPIs being tracked in the past year. The percentage of respondents tracking carbon emissions climbed from 36 percent to 57 percent, those tracking energy consumption rose to 59 percent from 42 percent and those tracking waste increased from 28 percent to 45 percent. Diversity remains the best-tracked metric, monitored by 83 percent of private fund leaders.

Tech impact

Portfolio management is the area most poised for tech disruption, followed by fund operations. Some firms are also making strides towards automating origination, with AI-driven tools that help curate potential targets. IR and fundraising, meanwhile, have been revolutionised by investor-friendly tools that really gained traction during the remote fundraisings of the pandemic. Indeed, few areas of private markets remain untouched by technology today.

The future of fundraising

Respondents are also preparing themselves for fundamental changes to the private markets’ investor base, with 60 percent predicting that private wealth will become an increasingly important component, and a further 52 percent predicting that retail money will move meaningfully into private markets over the next five years. A proliferation of feeder funds is helping to overcome historical obstacles for retail investors and open up this vast potential pool of capital for alternative asset classes.