On the minds of investors going into 2021

The panel

Pierre Abrial, partner, buyout fund selection – primary and secondary at Access Capital Partners

Mat Powley, director – private capital at Stonehage Fleming

Abraham Tiamiyu, principal, portfolio manager (secondaries) in the global private equity group at APG Asset Management

The LP Perspectives Study is conducted annually by Private Equity International to both gauge investors’ experience over the previous 12 months and to drill into their expectations for the year ahead. And when it comes to the future of the asset class, who better to give their take than PEI’s 40 under 40: Future Leaders of Private Equity? We asked a selection of our 2019 and 2020 Future 40 investors to share their outlook on the key trends shaping the industry, from more immediate concerns like adapting to covid-19-related challenges and virtual communications, to long-term themes such as environmental, social and governance considerations, and diversity and inclusion.

According to PEI’s LP Perspectives 2021 Study, ESG forms a major part of the due diligence process for 38 percent of respondents; looking forward, how do you expect investors’ focus on ESG to progress?

Mat Powley: I expect it to increase dramatically over the coming years. I think initially following covid-19, some investors expected ESG to take a back seat to more traditional areas of due diligence. However, what we have seen is the opposite. 2020 has continued to remind us why it is so important to place an increased emphasis on ESG. Whether it’s wildfires, grave social injustices or corporate fraud, environmental, social and governance issues will be much more than a tick-box exercise going forward.

Abraham Tiamiyu: ESG considerations will continue to play an important role in the PE industry. At APG, ESG is embedded across our three PE strategies: primary fund investments, secondaries and co-investments. Pre-investment, our global private equity investment process involves a comprehensive ESG due diligence process with a collaborative approach between our investment teams and our dedicated global responsible investment group. Post-investment, we also monitor our portfolio to track ESG progress as well as sustainable development investments, which we define as investment solutions that contribute to the UN Sustainable Development Goals (ie, by addressing urgent global issues such as water scarcity, healthcare access and protecting the environment).

Finally, in July 2020, APG and other global investors representing $1 trillion of assets under management publicly announced the establishment of the Sustainable Development Investments Asset Owner Platform demonstrating the increased focus on ESG across the industry.

Pierre Abrial: LPs’ ESG focus has become an essential criteria in evaluating GPs and funds. Since 2008, Access Capital Partners has systematically required target GPs to formally commit to integrate ESG factors into the whole investment process from initial due diligence to monitoring and reporting. Access rigorously tracks more than 30 qualitative and quantitative ESG key performance indicators and reports annually to its own investors.

More than two-thirds of respondents list covid-19 as one of the greatest risk factors for private market portfolio performance over the next 12 months; how do you see the industry adapting to ongoing pandemic-related uncertainties?

AT: Despite the uncertainties, the private equity industry is well-positioned to adapt to the changes caused by the covid-19 pandemic. In our portfolio, the initial actions we observed from GPs after covid-19 involved active portfolio management, including ensuring ample liquidity for portfolio companies. Subsequently, given the significant amount of dry powder in the PE industry, our GPs (across buyout, growth equity and distressed-for-control strategies) have continued to deploy capital in attractive investment opportunities across resilient sectors and defensive growth companies (including add-on acquisitions). We expect our top-performing private equity managers to continue delivering outperformance relative to public equity and other asset classes.

PA: Regarding portfolio management, most GPs have prepared their portfolio companies for a new lockdown, already asking the banks for some additional flexibility, adjusting the cost structure and making sure activity can continue with employees working from home, diversifying suppliers and finding new innovative sales channels. In terms of dealmaking, GPs are likely to focus on the most resilient sectors (ie, mission-critical B2B services, software-as-a-service businesses, healthcare services, e-commerce, long shelf life food production).

Do you think the shift to remote working due to covid-19 will result in a more virtual approach to LP-GP communications in the long term?

MP: I do – but there are pros and cons. On the one hand, GPs are able to organise virtual meetings and updates to a large audience of LPs relatively easily, frequently and with minimal cost, which can be a highly efficient means of communication and far superior to a more traditional investor conference call. However, private equity is a relationship-driven business and I value the face-to-face, in-person interaction I have with our managers, whether that be at AGMs or just regular catch up meetings. And as for diligence, while virtual sessions can be effective, nothing beats a physical onsite meeting.

AT: Yes, we have observed an accelerated digital transformation in communication. Managers have been proactive in updating investors on the financial and operational impact of the pandemic on their portfolio with many firms leveraging a colour-coded summary dashboard (green, yellow, red). In lieu of in-person meetings, we have seen a transition to video calls and webinars for due diligence sessions, annual meetings, and limited partner advisory committee sessions. We expect the increased efficiency provided by technology will help supplement and improve future LP-GP interaction.

PA: Frequency and volume of information flowing from portfolio companies to GPs and from GPs to LPs have noticeably increased during the pandemic. Access believes that digitalisation has and will continue to play a major role in providing transparency across the spectrum and help further strengthen LP-GP relationships.

Recent events have highlighted the importance of ensuring equality, diversity and inclusion are on private equity’s agenda; how can LPs and the wider industry help drive change?

MP: Investors should hold managers to account both on how they manage their portfolio companies with these factors in mind, as well as their own firms and hiring practices. Some managers are becoming increasingly forthcoming with this data, and while there is much still do to, it is a step in the right direction.

Investors should also practise what they preach and adopt initiatives within their own practices that encourage equality, diversity and inclusion in what is a comparatively very non-diverse industry. #100blackinterns is a great example of one such initiative and one we are very proud to be supporting.

AT: As allocators of capital, investors are able to drive change by allocating capital to managers making progress on equality, diversity and inclusion. Given the scale of APG’s platform (AUM of over €500 billion managed on behalf of 4.6 million pension participants), we can help advance these important issues in the private equity industry. For example, prior to each private equity fund investment, we require external managers to complete a due diligence questionnaire (this includes equality and diversity questions) and we score each PE manager, rank them against peers and track their progress over time (including leading up to each manager’s future fundraise engagement with APG).

What are the main challenges and opportunities for private equity in 2021?

MP: The main challenges will be similar to recent years, ie, high valuations for the best assets driven by record amounts of capital being raised. However, this will now be overlaid with the amplified uncertainties brought about by covid-19, which makes for a generally increasingly competitive environment for investors. We expect to see opportunities within distressed debt and special situations driven by covid-related disruptions, as well as technology/software driven by the rapid advancement of digitisation of the economy and society as a whole.

AT: Given the active ownership and control-oriented nature of the asset class, the PE industry is well-positioned to help drive progress on important issues such as diversity and climate change in 2021 and beyond. On diversity, the world’s largest dedicated alternative asset manager, Blackstone, recently committed in October 2020 to a target of one-third diverse representation on its portfolio companies’ boards.

Similarly, on climate change, the largest Dutch pension fund, ABP, publicly announced in 2020 plans for its investment portfolio to be carbon neutral by 2050 as well as plans to invest €15 billion in clean affordable energy over the next five years. I am excited to see the PE industry and capital allocators make progress on these important initiatives in 2021 and beyond.

PA: For portfolio management, the key challenge is adjusting the cost structure without compromising on the company’s ability to grow again when the situation improves. For dealmaking, the challenge is that intense competition for resilient assets is likely to drive prices up.

In terms of key opportunities, GPs will try to benefit from the European stimulus packages and political willingness to relocate strategic activities from Asia back to Europe.