Five key lessons from 2020 for fund managers

Standardization is on its way

In Europe, participating US fund managers will start feeling the impact of environmental, social and governance standardization that will take effect in March 2021. Per an Intertrust survey, most managers polled expect full US ESG standardization in three to five years.

Similarly, a growing chorus is calling for standardization in impact investing, which is challenged by the lack of a unified approach, says JTC’s Wouter Plantenga.

“There is also a lack of clear data. That’s why we see managers defining their own strategies for measuring impact data themselves,” he says. “Impact investment is becoming a meaningful topic on their agendas and this mission-driven pivot is leading to fund managers – particularly bigger managers – setting up separate vehicles for impact investing.”

Valuations are becoming less art, more science

Regulators have signaled that private equity investors should prepare for updated guidance around fund valuation policy frameworks.

In April, the SEC announced plans to propose a new rule establishing just such a framework, one intended to “clarify how fund boards can satisfy their valuation obligations,” the Commission said. This came just after covid-19 shook valuations in March – and even now they remain unstable as the pandemic rages on.

In an audience poll conducted during Duff & Phelps’ Alternative Investments Virtual Conference in early November, more than 40 percent of respondents said they expect upcoming guidance to focus on improved rigor or governance in the estimation of fair value.

NAV loans are filling some of the bank void

“Getting leverage for debt purchases is very much top of the list for many firms given the current environment,” says Kirkland & Ellis’ Jocelyn Hirsch.

That’s something that has not gone unnoticed by “a small band of ‘concentrated NAV’ lenders” who focus on net-asset-value loans, a niche of the debt market, says Private Funds CFO editor Graham Bippart. These lenders have stepped up to provide liquidity amid a flood of demand from mid-market funds just as traditional bank lenders are tightening their purse strings.

In January, NAV-loan focused Hark Capital’s Doug Cruikshank told Private Funds CFO: “At some point, we will hit a downside scenario … and, in general, portfolios will take more time, not less, to come to fruition. In those cases, the sponsors will want the optionality and the capital we provide.” Less than two months later, Cruikshank was proven right.

“These alternative lenders are providing much-needed financing to the market,” says Fund Finance Partners’ Zachary Barnett, even if their capacity is not going to be enough “to plug the gap for many of the 4,000 private fund sponsors that are going to be in search of liquidity, some for accretive and others for protective purposes,” he adds.

Covid revealed the need for massive tech upgrades

While there was an initial pause early after the pandemic started to spread in the US, it wasn’t long before work began again. But instead of buzzing offices, private equity work was – and still is – being done from home.

The unexpected workforce decentralization exposed several weaknesses in how data is handled, processed, catalogued, stored and shared. FIS’s Shannon Dolan says that “as covid-19 accelerates the industry’s reliance on digital solutions, GPs would do well to upgrade their technology for both now and the long run.”

She adds: “Two of the key priorities of CFOs at the moment are migration of data to cloud solutions for fund accounting, deal sourcing, LP reporting and the like, and choosing SaaS options.”

And Lionpoint’s Bill McMahon says the lack of availability and standardization of data is a serious problem for many firms.

“Most firms have bespoke Excel models for micro-level forecasting. These are often owned by a single individual, with that one person being responsible for the inputs, outputs – really, the entire infrastructure,” he says. “But that isolates those findings and makes it very hard to overlay additional assumptions and blend them all together for a more comprehensive view.”

Fund execs are agnostic on the political and regulatory climate

A collective sigh of relief passed through the lips of US fund managers about a week after the November 3 election when it became clear there would be no one-party majority across the executive and legislative branches of the federal government, according to conversations had by Private Funds CFO reporter Connor Hussey.

The blue wave that some were expecting never materialized, and instead, the American people made it clear that they weren’t interested in giving either party the whole enchilada.

But while this may be a sign PE is less likely to be front and center of the policy conversation in coming years, it is likely that regulators will step in to fill the breach.

“What I expect to see over the next four years, like we did under the Obama administration, is additional funds allocated to the SEC budget, and that will translate directly into hiring additional positions, particularly in the enforcement division,” says Mark Schonfeld, partner and co-chair of securities enforcement practice group at Gibson Dunn & Crutcher. “Private equity firms have a window of time before the spotlight gets turned back on them to make sure they have implemented solutions to the regulatory lessons learned from the prior administration.”