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No amount of scenario planning could have prepared private markets firms for the extraordinary events of the past 18 months.
But it is clear the far-reaching effects of the pandemic have accelerated change that would otherwise have taken decades. It is also clear that this change is here to stay. And so those who lead private markets firms must re-evaluate every aspect of the fund lifecycle, review their operating models and incorporate new ways of working.
It is against this unpredictable backdrop that affiliate title Private Funds CFO decided to gauge the opinion of the most senior figures in the world’s private markets houses, with the inaugural Private Funds Leaders Survey 2021, conducted in partnership with MUFG Investor Services.
The results reflect a period of transition and uncertainty, but also one of excitement and optimism. These seven charts demonstrate how today’s private funds leaders really feel about the challenges and opportunities that await them over the next
Respondents are overwhelmingly optimistic about their operating environment, despite an undeniably challenging year. Almost 80 percent believe the next 12 months will represent an improvement, while 74 percent believe the backdrop for private markets is more attractive than is the case for their public equity peers. There is solid evidence of the growing popularity of private debt. Of those firms planning to launch a fund with a different strategy to their firm’s heritage, private debt emerged as easily the most favoured strategy.
Macro factors that matter
Covid scarcely registered when we asked respondents which macro factors would have the greatest impact on private markets over the next 12 months. Instead, everything from stock market volatility to Brexit rated more highly. This reflects the inherently long-term nature of these strategies. “These are long-term asset classes, so it doesn’t make sense to overly focus on transitory factors,” says Stuart Waugh, managing partner at Northleaf Capital Partners. “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.”
Appetite from Asia
Investor appetite for private markets continues to be insatiable, but the make-up of the investor base is changing. Almost three-quarters of respondents expect Asian LPs to represent a larger proportion of their capital over the next five years, while 60 percent expect the same to be true of the Middle East. Respondents also predicted changes in the types of investor committing to their funds. But despite noise around the democratisation of private markets, there was little belief that retail investors would make serious inroads any time soon, with less than half of respondents predicting an increase.
A people business
Despite a growing focus on the role of technology, private markets continue to be a people business, with talent management considered the most important operational lever to a successful portfolio company investment cycle. “Nothing beats a good management team,” says Shani Zindel, chief investment officer at Livingbridge. “Absolutely nothing.” Talent management was closely followed by the delivery of a value creation programme, effective cost management and technology integration.
Power of technology
Technology is going to play an ever-more important role in the operations of investment firms themselves. Fund operations is the area deemed most likely to be impacted by technology investment, followed by portfolio management, fundraising, deal origination and investor relations. “Technology has been broadly deployed for years in fund operations and other administrative areas,” says Frank Nash, founder and managing member of ATL Partners. “The most significant change going forward will be how we increasingly employ technology to gather information regarding fundraising and deployment.”
Trend towards outsourcing
The cost of buying or building these in-house tech solutions is one factor driving the continued trend towards outsourcing. Private markets firms are focusing their in-house attention on areas where they can genuinely differentiate, and are bringing in third parties for anything deemed non-core. LPs are also keen to see certain functions kept at arm’s length, while experience of remote working over the course of the past year has caused managers to re-evaluate the balance of outsourcing in their operating models.
Keeping track of ESG
Private markets firms are increasingly using technology and third-party advisers to help monitor and report on ESG metrics. Yet despite all the attention this area is receiving, it is clear that the tracking of key performance indicators is still in its early stages. Around three-quarters of respondents keep tabs on easy-to-access information such as board composition and diversity, but 36 percent are tracking carbon emissions and 28 percent have a clear view on waste. The survey also revealed clear intentions to improve, with carbon and waste at the top of the agenda.