When industry commentators were making their predictions for 2020 and the decade ahead at the end of last year, it’s unlikely a pandemic, nationwide lockdowns and extensive economic turmoil were high on their list of probable scenarios. And yet, here we are.
Covid-19 has had a devastating impact on individuals, communities and businesses, with investment managers working hard to support their portfolio companies and mitigate the fallout from the virus where they can. Amid this uncertainty, it seems precarious to forecast with any conviction the future developments that will shape private equity moving forward. However, there are some changes that look likely as the industry navigates the path ahead.
Finding new ways to deal with disruption
Travel restrictions and the enforced shift to remote working throw up obstacles for an industry where relationship-building is key.
But as lockdown and social distancing measures continue, staff at GPs and LPs, like many other office-based workers, have been adapting to this new virtual reality and tapping into alternative channels of communication, such as video conferencing and podcast updates. An already growing focus on online connectivity and digital processes is expected to intensify as a result of the outbreak.
“The current crisis is likely to accelerate the trend towards digitisation of company processes across the board, from HR and marketing through to compliance,” says Emmanuel Laillier, head of private equity at Tikehau Capital.
LP communications will be especially important for firms that are fundraising. While first-time funds are likely to be particularly vulnerable, more established GPs with longstanding investor relationships that were already raising a fund are generally expected to hit targets. This may come with a delay though; 43 percent of GP respondents to Private Equity International’s covid-19 study plan to extend the fundraising period.
Clearly support for existing portfolio companies is an immediate concern for GPs, but financial market distress and lower asset valuations can also present new investment opportunities, and with public markets in disarray, the private equity industry could help businesses return to growth as we move out of this crisis.
As Fokke Lucas, managing director at 17Capital, notes: “Especially in times of disruption, such as covid-19 or the global financial crisis, privately held investments can be managed without public markets pressure. Private equity managers can focus on the long-term development of a company without having to manage short-term public market sentiment.”
Embracing a chance for change
The present uncertainty offers an occasion to reshape private equity and its relationship with communities, and the next generation of industry leaders will have a pivotal part to play in this. Each year, PEI recognises upcoming talent through its 40 under 40: Future Leaders of Private Equity list. To get a sense of their aspirations for the industry, we asked a panel of this year’s Future 40 how they would like to see private equity evolve over the next 10 years.
Yup Kim, senior portfolio manager, private equity and special opportunities at the Alaska Permanent Fund Corporation: I’d love to see the private equity industry serve as a powerful catalyst for conscious and inclusive capitalism – and over time, see more of the equity value created accrue to our teachers, firefighters, state workers and grant-making professionals. I’m fully supportive of enriching those who work tirelessly to execute and deliver on their mandate, but as an industry, the ratio of “results-driven” carried interest to management fees remains, in my opinion, too low.
Emily Brown, partner at Schulte Roth & Zabel: I would like the industry to be more attuned to its public profile. Around 10 years ago, private equity was called out (I believe wrongly) as one of the villains of the last global financial crisis. Ten years from now I would like to be looking back and saying that private equity was not only part of the solution to the crisis we are entering at the moment, but that it was seen to be a vital part of the solution.
Michelle Tong, partner at Sidley Austin: Gender diversity has deservedly been a hot topic of late, but diversity in all its forms would be a boon to the private equity industry. Good ideas from a wide range of perspectives can only lead to better decision-making. Significant strides have already been made at more junior levels, but I’d love to see that trend translate into more diversity in senior roles in the future.
Eric Deyle, managing director and co-head of private equity at Eaton Partners: I would like to see: impact investing/ESG continue to grow and generate investment return outperformance; greater diversity of people and ideas; and the word “proprietary” not being used when describing a private equity firm’s dealflow. From my favourite television show Seinfeld, Kramer: “Jerry, buddy, I got to tell you something. That voice is played.” Jerry: “Really?” Kramer: “So played.”
David Fox, managing director at Blackstone Strategic Partners: I imagine in the near term we will see the markets shift to become more accessible to retail investors, which will require increased transparency. At Blackstone, we are focused on making a positive societal impact through our investment activities, our focus on ESG and through the great work of our charitable foundation. As a general solution provider for the market, secondaries enable investors to be tactical and re-balance their portfolios. I predict huge growth here, and with the growth I imagine we’ll see more creativity and different types of field structures that will blur strategies across the board.
Fokke Lucas, managing director at 17Capital: I would like to see more equal opportunities, and as a result more diversity in the private equity community. The industry is rightfully putting a lot of focus on this and hopefully we will see the fruits of that labour in 10 years’ time. I would also like to see the trend in investor relations continuing. When I started my career, an investor was undervalued in the industry. Over the last 5-10 years GPs have started to service their clients better. Certainly, at 17Capital, our LPs are at the centre of our businesses and at the top of our minds in everything we do.
Doubling down on societal considerations
The widespread impact of the pandemic has highlighted areas of vulnerability across society and hit home the importance of considering environmental, social and governance issues, with a particular emphasis on the ‘social’.
“The S of ESG has often been the poorer cousin of the E and G,” says Brian Lim, a partner at Pantheon. “However, there will be significant stress that comes from this crisis at a social level. I think this will concentrate minds at LP and GP level on areas such as workers’ rights and there may well be a shift more generally for businesses to have to be socially responsible if they are to remain viable.”
It has also shone a spotlight on the areas that impact investing strategies have been weighing up for some time. Michael Etzel, a partner at social impact consultancy The Bridgespan Group, says: “In a sense, we’re all becoming impact investors – and those with more experience under their belts can play an important leadership role in the investing community as we navigate these joint human and economic challenges. A time of crisis is also a time to step up.”
How private equity acts on these considerations going forward could not only dictate how its role in the world is perceived outside of the industry, it is also a matter that could impact the sector at a firm level. Firms must do more than pay lip service to issues such as ESG if they are to retain top talent for the long term, explains Rupert Bell, principal consultant and head of DACH at recruitment firm PER. “Now more than ever, individuals are also driven by non-financial factors such as transparency of decision-making, diversity, ESG policies and the level of emotional intelligence of the leadership,” he says.