2017 proved to be hugely successful for global private equity and despite rising valuations and increased levels of competition, the general feeling among PE groups is upbeat for 2018, confident that they can still deploy capital with effect.
As Preqin outlined in its recently published 2018 Global Private Equity and Venture Capital report, the headline numbers for 2017 were impressive.
A total of USD453 billion in aggregate capital was raised by 921 PE funds. This took total AUM within private equity to USD2.83 trillion.
95 per cent of investors felt that their PE investments met or exceeded expectations. More than half (53 per cent) said they planned to increase their allocation to this asset class over the longer term. That said, 88 per cent of LPs felt that valuations will likely be the biggest challenge to PE over the coming years; a sign perhaps that they are willing to lower their return expectations.
Overall, therefore, there is much to be cheerful about for the year ahead. Which seems fitting that Private Equity Wire was able to celebrate the achievements of fund managers and service providers alike at its 2nd annual awards event on Thursday 8th February, 2018.
These awards are testament to the hard work and dedication that all of our winners have put in over the last 12 months to earn the votes of their peers.
One of our double award winners is Pantheon, voted Best Secondaries House and Best Private Equity Management Firm. Speaking about the culture needed to build a successful business over 35 years to offer investors the most attractive investment opportunities, Amanda McCrystal, Global Head of Marketing, says that it comes down to clarity of strategy and market position.
“This includes a commitment to transparent communications, sustainable business expansion, and a commitment to our principal business model – fund investing. It’s important to have a recognisable brand and articulate a business model that our network of GPs understands, and which doesn’t change according to which way the economic wind is blowing,” says McCrystal.
The PE secondaries market has enjoyed significant growth over the years, with 2017 proving to be a standout year. Preqin’s figures show that a total of USD37 billion of aggregate capital was raised by 30 secondaries funds, with a further 34 funds in active fund raising mode as of January 2018. Such is the range of PE secondary funds in the marketplace, that intermediaries are now tailoring their invitation lists to participate in a deal they may be broking based on the type of strategy those firms are following.
“A decade ago,” says McCrystal, “everyone would have been invited to participate in deals and would often club together to get deals done. Any mature market brings with it greater specialisation, and that is what we are seeing. We think the market and the opportunities within it are tremendously exciting.”
She adds that the initiatives and activities that Pantheon focuses on in a given year tend to be informed “by us trying to interpret what themes – investment or other – may command our clients’ concern, and then position ourselves to be responsive to those concerns.
“One example of that is ESG risk reporting where we’ve seen an upswing in demand for granular reporting.”
To try to be ahead of the curve in trends like increased demand for reporting transparency, for example, Pantheon endorsed the ILPA Reporting Template in Q4 2017.
This call for greater transparency and insight into the performance of PE funds is playing to the strengths of technology firms who are coming up with vast arrays of tools and analytics to monitor and benchmark the performance of the private funds marketplace.
One such platform leading the way in this is CEPRES, voted Best Portfolio Management Software Provider.
Providing the ability for investors to effectively benchmark GPs could be an important enhancement and whilst Dr. Daniel Schmidt, CEO of CEPRES doesn’t think it will change the way that people think about why they should invest, it should give them greater efficiency. “They will be able to perform analysis on a much wider range of GPs in a much shorter timeframe,” he says.
The CEPRES system starts on a headline analysis basis and goes very deep, looking at different operating metrics. Users can do not only individual GP analysis, it also helps them to understand things from a portfolio context. “Risk is not only the volatility of a fund’s IRR, or the volatility of an underlying company’s returns, it is also understanding the co-movement of other asset classes.
“What is the correlation of a PE strategy, or sub-class of investments an individual GP has made, not only to other PE markets but also to stocks and other traditional markets?
“This beta risk can be tested on the platform. A particular GP might not be the best performing manager but they might have the lowest correlation to other assets that the investor has added to the platform,” explains Schmidt.
This allows LPs to measure the beta risk of adding a new GP within their portfolio and deciding whether or not to add them. There’s a lot of complex analysis that one can do on their portfolio, based on looking at thousands of portfolio companies and funds.
Technology is therefore playing a vital role in private markets today, with the depth and breath of tools offered by CEPRES and other providers, only likely to increase.
This is important given that PE managers are becoming operationally more complex, as they seek to establish regulated vehicles as well as offshore structures, to suit investor demands.
As PE managers launch these multi-jurisdictional products, it is prompting service providers to respond in kind. EisnerAmper LLP, voted Best Fund Accounting Firm, is one such example, which embarked on a globalisation strategy a few years ago.
“EisnerAmper LLP globalised its brand to meet the needs of its clients. The brand recognition that EisnerAmper LLP is getting globally has helped our clients meet their global investors demands and has helped the firm attract more talented professionals. What began as a defensive strategy due to the demands of our clients has turned into an offensive strategy that has helped us serve some of the largest investment advisors globally,” says Nick Tsafos, Audit Partner at EisnerAmper LLP.
One trend that will likely continue in 2018, certainly in the US, is outsourcing, as PE groups stick to building out their deal teams and farming back-office functions out to a trusted third party that can act as an extension of their operations team. There are clear cost and time benefits to doing this. Not to mention data security benefits.
“We have secure connectivity between all our global entities. That is a significant advantage and a huge selling point in terms of securely managing a client’s global data in a way that is reportable and is monitored 24/7,” explains Mark Coriaty, Chief Strategy Officer at Eze Castle Integration, voted Best Technology Outsourced Cloud Provider this year.
Coriaty continues: “We have technical engineer teams working on our global support desks, as well as a Client Technology Manager who works directly with each client to ensure their architecture is scalable and to provide consulting support. Additionally, we have a centralised group called the Solutions Centre, which will work specifically with clients on any of their business needs; ordering new equipment, opening up a new office.
“It is a balanced, well constituted approach in terms of supporting both the technical and business needs of our clients.”
When PE managers are doing deals they usually use a private room or a consolidator of data; something that ECI will be focusing on for the Eze Private Cloud, with Coriaty confirming: “Collaboration and workflow tools are definitely on our roadmap in 2018 to further support our PE clients.”
As PE groups consider their options and look to transition to an outsourced arrangement, David Bailey, Global Head of Marketing and Communications at Augentius, voted Best AIFM Fund Administrator, offers the following advice, to conclude: “The more that individual groups can identify their “needs and wants” before they start looking for administrators, the better prepared they will be to go through the process and achieve their own business objectives. Administrators should be tailoring their services to specific client needs and knowing what you want and how you will work together “hand in glove” is key to the development of a high quality working relationship.”