No one knows with absolute certainty what’s in store for 2015, but that doesn’t mean some reasonable predictions can’t be made. Here’s three of our own:
The LP pool will deepen: The private funds space will become a little bit more democratized in 2015. What we’ll see is the asset class becoming increasingly accessible to retail investors, many of whom have been shut out from the industry because of regulatory constraints. In the US, we predict the SEC will ultimately redefine “accredited investor” – meaning the people wealthy enough to invest in closed-ended private funds – to also include people with the right knowhow or financial literacy, in effect expanding the population of accredited investors. Expect a similar story to play out in Europe. EU policymakers are on the cusp of allowing fund managers authorized under the AIFMD to access retail investors, which seems more likely now that the EVCA is negotiating with the European Parliament and Commission on how this thing can work. Meanwhile pacesetters within the industry like The Carlyle Group will continue tinkering with fund structures that allow people to invest as little as $50,000 in their funds, which can serve as the vehicle for retail investors’ entrance into the asset class.
A major GP will be crucified:We all remember the SEC’s top inspector, Drew Bowden, saying earlier this year that some 50 percent of private equity firms recently examined by the commission have some type of compliance shortfall on fees. But so far the only enforcement action taken place has been against relatively less known shops committing particularly egregious compliance failures, like when Arizona private equity firm Clean Energy Capital was charged with using fund capital to pay for employees’ tuition costs, car washes and holiday cards. Like all political/regulatory entities, the SEC wants to justify its existence and demonstrate its ability to crack down on abuses from all corners of the industry. So dare we predict a major firm will be made an example of? If the 50 percent figure is true, it wouldn’t be hard for the commission to find a well-known firm to crucify, which would dovetail neatly with the release of its report detailing its findings stemming from a two year sweep of newly-registered firms brought under its purview by Dodd-Frank.
The ESG wave will begin makings its way to emerging markets:‘Begin’ is probably the operative word in our third prediction. The cultural differences and varying standards – created by different periods of political, economic and legal development – make environmental, social and governance policies a difficult sell in places like Asia, Latin America and Africa, but all signs point to their eventual acceptance. For one, the days of relying on inflation and growth to drive your investment returns are pretty much over. At the same time more GPs are waking up to the fact that a smart dedication to ESG is not mutually exclusive with returns (in fact the two often work in tandem). Secondly, the emerging markets are already adopting industry practices honed for decades in the West. Already Asia is experiencing an uptick in demand for operating partners, who are arguably best placed to capture low hanging ESG fruit at portfolio companies. And LPs, especially in Europe, are becoming louder about the need for a strong ESG commitment before dedicating capital, which may influence LPs in other corners of the globe to follow their message.
Got your own predictions for 2015? We’d love to hear them. Email pfm editor Nicholas Donato at nicholas.d@peimedia with your best forward-looking insights.