These are interesting times for the private equity industry. Compared with the past, there is no strongly-defined trend, either in a positive or negative direction. But for well-managed, innovative and well-resourced funds and their service providers, there is potentially a wealth of opportunities.
Ongoing difficulties surround the banking sector and the high levels of leverage that still exist within some deals structured at the height of the private equity boom. But as Brett Allen (pictured), Head of BNP Paribas Securities Services’ product team in the Channel Islands points out, some market participants are in a strong position to benefit in this environment. “First of all, it is possible to acquire assets at attractive prices,” he says. “In addition, at a time of low returns on bank deposits, a return of 8-15% from private equity is seen as desirable and those with cash are looking for investment options.”
While new funds have slowed considerably, there is still cash looking for a home and follow-on funds from reputable groups are relatively easy to launch with latent demand. “In fractured markets, there are always opportunities,” Allen says.
Debt funds, in particular, are in demand by private equity houses, which see opportunity in under-priced assets and due to the desire by banks and other lenders to cleanse or improve their balance sheets. “These funds are attracting investment, although they tend to have shorter time horizons to maturity than conventional private equity mandates and investors are looking for income as well as capital returns,” Allen notes.
While the larger, international fund houses tend to be best positioned to launch such funds, smaller asset managers are developing these opportunities as they pick off under-priced assets, and can move at speed to market. Both require service providers with a seamless global model. Allen says that with resources available in 32 countries and access to over 100 markets, BNP Paribas Securities Services can help support a broader operating base while maintaining the appropriate risk and operational controls.
A local presence is critical to service clients effectively adds Allen. In addition, clients feel more comfortable being serviced by long-established, financially-secure service providers. “Our balance sheet is important to investors,” he says.
Of course, the quality of the accounting and reporting is a primary consideration in choosing an administrator, as issues such as fair value and transparency continue to exercise funds and their investors.
“The notion of accounting for assets at book cost is increasingly challenged,” says Allen. “Where fair value has been evaluated, investors now like to know how the figures were arrived at; what reference prices were used and which methodology was selected.” More informed reporting with quicker turnround times is also becoming a feature. Liquidity is always an issue and investors are managing their commitments by choosing their investment criteria with the use of side letters or carve outs adding additional complexity to the accounting process.
In the wake of the proposed Alternative Investment Fund Managers directive, funds may have to include additional custody controls and processes. “We already have processes and procedures in place to add value to the proposition and are actively working on propositions in this area,” says Allen.
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