“This could be the call to arms which the industry has been waiting for” - Q&A with Michael Johnson, Crestbridge

Michael Johnson, Crestbridge

Michael Johnson (pictured) is responsible for continuing to grow and evolve Crestbridge’s overall funds proposition. Here he discusses how Covid has created barriers to private equity fundraising, what challenges GPs are facing going forward beyond Covid and how managers can best position themselves to address these.

How has Covid created barriers to private equity fundraising?

Instinctively, the assumption would be that the Covid-19 crisis has created a significant challenge to private equity fundraising; without the capacity to hold face-to-face meetings, GPs are left to look for an alternative to the perennial industry practice of meeting potential investors in-person. While technology can go some way to alleviating this, there are certainly those who argue that without the human factor the realization of raising capital will most likely suffer.

This, however, has been proven to not be the case. Recent data from Preqin has revealed H1 2020 to be the most successful period of fundraising the secondaries market has ever seen; a record USD44 billion was raised over the first six months of the year, with 16 managers currently in the market with targets in excess of USD1 billion, and the three largest funds closed so far this year having secured USD36 billion in aggregate capital.

This is a testament to the resilience of the private equity industry, and its track record of outperforming in crises. While a decline in funds raised might seem like a natural expectation in light of Covid, the reality is that the people whose job it is to raise those funds are very good at what they do, and have demonstrated their versatility and ability to adapt to new challenges.

What do you think the future has in store for the PE industry?

Without doubt, the private equity industry has a lucrative future ahead of it. The trend towards growth has been exceptional over the past years, with the BVCA  estimating that UK private equity fundraising increased to GBP47.5 billion in 2019, and there is no reason for this to be abated by Covid-19. The industry as a whole has a strong record of performing incredibly well in crises, with a 2015 study in The Private Equity Journal estimating that PE portfolio companies earned an 8 per cent higher market share during the 2008 financial crisis than a relevant set of non-PE owned peers.

Indeed, the current situation we find ourselves in could even act as a catalyst and an additional driver for this growth. Bain & Co estimate that by the end of 2019 PE firms globally had amassed around USD2.5 trillion in dry powder, with USD830 billion for buyouts alone. The deep discounts that markets are trading at now, exacerbated by many firms needing capital injections or wanting to offload distressed assets, could be the call to arms which the industry has been waiting for.

Beyond Covid, what other challenges within the industry are GPs facing?

Whilst Covid has accelerated the process, the move towards flexible working and increased digitalisation has been a wider trend. This paradigm shift requires different infrastructure requirements in the way businesses are set up and a cultural rethink to boot. Navigating market conditions aside, GPs have been forced to reimagine the way they work and crucially how they can engage LP’s in an increasingly digital world.

Practically, this has created a need to revise cybersecurity protocols, converting pitch decks and investor relations materials into webinar format and ensuring that web spaces are fully optimised. From a conceptual point of view, the challenge of leading a team and maintaining an effective working culture outside of the office is a significant task. Going forward, once lockdowns are lifted GP’s will still likely be expected to be able to assess the quality of opportunities without face-to-face meetings and without the strength of a handshake.

How can managers best position themselves to address these?

The best way managers can address these novel challenges is to invest in innovation solutions; investments in cloud software are a future-proof means of increasing business results further down the line. A recent McKinsey report stated that cloud platforms provide “simplified innovation, easier scalability, and reduced risk” and “can support analytics that would be uneconomical or simply impossible with traditional technology platforms.”

GPs can also adopt a wider utilisation of AI. Typical face to face meetings provide qualitative and very ‘human’ data which provides information on the leadership of target companies. A heavier reliance on quantitative assessment techniques may be appropriate, which can be better delivered by AI. This, however, does not translate into disregarding the human factor; AI in its current state is a tool, not a replacement, and it is through a symbiosis of man and machine that firms will see the best results delivered.

Additionally, firms can embrace the trend of outsourcing their administrative burdens to third-party specialists. Not only does this improve efficiency, but it also protects and innovates investor reporting, reduces senior management attention to local regulations, and provides more assurance to investors on the separation of duties from the GP themselves.