Flexibility the key in uncertain times
As it recovers from the downturn, the private equity industry is becoming more eclectic as managers invest in an increasingly diverse range of asset classes – witness the huge interest at present in debt structures, as well as the growing trend toward investments that aim to capitalise on environment friendly technologies. Against this backdrop, especially amid continuing market uncertainty, the great flexibility of Luxembourg’s Specialised Investment Fund (SIF), along with the jurisdiction’s skills and experience, represent an important competitive advantage.
The uncertainty is reflected in the difficulties that some industry players face in new fundraising. Some specialist private equity managers whose main investor base has extensive uncalled commitments are finding it difficult to meet their fundraising targets. However, large institutional asset managers with private equity arms, which have access to a broader range of potential investors through their distribution networks, appear to be doing better. The result is an influx of investors that may not have significant existing exposure to private equity.
In the wake of the crisis, institutional managers are responding to the demands of their own clients by seeking improved reporting solutions from their service providers, notably the integration of reporting requirements for private equity and real estate with other alternative and traditional assets. This reflects an important lesson of the crisis, that investments such as private equity, equity market neutral strategies and long-only equity funds may not be as uncorrelated as previously believed.
Unified reporting will assist managers, particularly of diversified portfolios, in managing supposedly distinct asset classes that in fact are quite closely correlated in terms of risk and return. For example, an investor might have exposure to the same property investment company through the short positions of a hedge fund, the underlying investments of a fund of funds, a direct equity holding in long-only funds and a management relationship through private equity real estate structures.
To treat these positions as separate asset classes is beside the point; institutional investors want to be able to look at them together for asset allocation, risk management and the integrity of their investment process. This places new requirements upon service providers that organisations aspiring to industry leadership must be able to handle.
Another significant development is the trend among institutional managers to centralise the administration of funds domiciled in different jurisdictions, benefiting centres like Luxembourg that have expertise in multiple GAAP and IFRS standards as well multilingual capabilities. It is also important to support a broad spectrum of domiciles, both at fund and underlying holding company/SPV level. Service providers with both pan-European and global networks, such as BNP Paribas, are well positioned to service these funds.
These developments strengthen Luxembourg’s position in the private equity market, building on its position as a financial centre within the European Union, its increasingly impressive advisory, audit and service provider community, and a depth of expertise particularly appealing to European and Asian institutional investors.
It also benefits from the popularity of the SIF. Its great flexibility is particularly prized by managers at a time when private equity structures are investing in more sophisticated assets, where the distinction between private equity and real estate and infrastructure, for example, is ever more blurred, especially from a structuring perspective, and when investment perspectives can change drastically over the course of just a few months.
Chris Adams is global product head for alternative funds at BNP Paribas Securities Services, based in its Luxembourg office
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