Promising prospects along a bumpy road

By A Paris – Starting the year with record levels of cash, the private equity industry was, arguably, in a favourable position to weather the storm caused by the Covid-19 pandemic which threw the world into chaos in March 2020. Due to its inherent long-term characteristics and patient capital, private equity is arguably better placed than other sectors to weather the pandemic. But despite this, all areas are being impacted in one way or the other, from valuations and fundraising to cashflow and operational threats, private equity managers are run off their feet, trying to keep up and adapt in an effort to come out of the crisis still whole.

“What makes the private equity challenge uniquely difficult is the range of risks presented by a complex portfolio of companies spanning a number of industries and geographies.

“Generalised playbooks don’t add much value at a time when a global crisis affects each portfolio company differently. What’s critical is developing a practical plan to assess risk, prioritise action and execute quickly,” say Bain partners Marc Lino, Hubert Shen, Andrei Vorobyov and Hao Zhou in an opinion piece.

Despite the challenges, this time can present the opportunity to solidify firm relationships with third party partners as they provide support to help managers see it through.

The private equity world has witnessed growth in outsourcing and automating business processes. The McKinsey Global Private Markets Review 2019 says: “Intelligent process automation frees valued employees from burdensome work, so they can focus on value-adding activities. That helps firms retain top talent and scale more efficiently.”

In fact, talent firms have also been experiencing the effects of this. Georgina Bale, CEO, Bower Talent comments: “Private equity firms have become one of the best industries in appreciating how important support and operations staff are to a business – from reception level, all the way up the chain to COO.”

This takes on an even more vital dimension given the current environment. Gavan McGuire Head of Business Development, Centaur notes: “At times like this, investors become extremely concerned about performance and are looking for reassurance that systems are in place to properly manage risk remotely – they prefer investment managers to focus on maintaining their underlying investments and not to have the distraction of having to evoke business continuity plans around administration and regulatory services.”

According to Roger Woolman, Sales and Business Development Director, Fund Management & Alternative Investments at SS&C Advent, technology moves the investment management and investment administration industry closer to its goal of a fully self-serviced, digital, experience. He explains how PE and hybrid funds need an integrated investment and investor management capability together with an accounting function which can serve as a platform for both transparency and growth. Woolman says: “These challenges are resolved with a solution that facilitates that growth without adding headcount or variable costs.”

A bright future

“The industry currently represents less than 5 per cent of total global assets under management and less than 2 per cent of total investable capital worldwide, leaving plenty of room for the industry to grow. With underachieving companies obliged to focus on bolstering balance sheets, well-positioned private equity firms can take advantage to embrace new investments,” write Francisco Bolota, Maria Mikolajczyk of the Bocconi Students Private Equity Club.

Further, they say it is likely that large PE funds will be forced to diversify across markets and asset classes while smaller houses may need to focus on high growth niches. And this will not be possible without strong partners to improve operational efficiency.

Bale at Bower Talent anticipates a greater emphasis on data analytics, business intelligence and ways to create better operational efficiencies within firms: “We expect this, alongside implementation of automation and tech, to help firms to stay lean.”

This sentiment is echoed by Daniel Schmidt, Founder and CEO of Fintech firm CEPRES: “We expect a full digitisation of the investment process for private capital markets with counterparties choosing to act online rather than revert to the old-fashioned approaches. This will be combined with even deeper demands for transactional data exchange to underwrite investment decisions and monitor portfolios based on straight-through-processing.”

Given returns are reverting to mean, factors like operational efficiency and the usage of the valuable data are becoming differentiators and GPs are focusing on getting more value from these elements. This includes the emphasis on digitisation.

Sam Metland, Head of Private Equity Product at Citco comments: “The top managers are now using digital as a way to differentiator from their peers. As the rest of the industry follows the leaders into digital we expect to see a huge growth in adoption of new tools and new ways of working. This will lead to industrialisation and standardisation of processes throughout the value chain. We also expect managers to look more to respond to LP pressure for transparency on ESG of portfolio companies as well as move to more Impact investing.”

Sasha Jensen of Jensen Partners expects an inevitable deal-making slowdown following the positive cycle the industry was just on. However, this will not mean hiring will slow down in the PE space. “We’re seeing an increase in private credit fund launches, which will absolutely bolster hiring numbers and activity. As we enter and begin to navigate this new environment, it will be crucial for private equity firms to double-down on their own operations and ensure they have the best talent to fair market conditions,” she notes.

The current upheaval is also causing firms to review existing investments and consider new opportunities.

“People now have the opportunity to re-think and reset. This will bring on a new wave of entrepreneurship which VC supporters will find attractive. Opportunities will be broad as new market opportunities are developed and investment decisions are accelerated – we have already seen a dramatic shift on how people are working now and possibly will want to work in the future,” McGuire at Centaur concludes. 

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