This article is sponsored by Juniper Square
In the wake of a global pandemic, rising inflation, rising interest rates and geopolitical drama, the pace of private equity fundraising has waned. Firms are now wondering how long it will take for the market to rebound and what it will look like when it does. For now, many firms are taking a “wait-and-see” approach and are looking to be more selective of opportunities, more rigorous in diligence and more conservative in financing, knowing that worst-case scenarios need to be considered as a possibility.
One of the positive outcomes of the current slowdown is that firms are finally finding the time to take stock of their internal operations and systems, according to Eugene Tetlow, head of strategy for private equity and venture capital at Juniper Square, a technology provider and fund administrator. We sat down with Eugene to discuss how GPs can make the most of this time before the next boom.
After the last few years, no one wants to be in the prediction business, but even the present can be hard to define. What does the current market look like to you?
We’re exiting a long period of private equity and venture capital riding a big wave of growth and plentiful opportunities. Now we’re in a stage of uncertainty, due to multiple macroeconomic factors hitting the industry all at once.
For one, there’s inflation, which is damaging because it eats away the value of investments that can take between five and seven years to exit. Then there are the rising interest rates, which will impact the industry’s return expectations. There’s also general global economic uncertainty and geopolitical risk from the war in Ukraine, as well as questions about China’s ambitions. All of this is leading to uncertainty among PE limited partners and increasing the relative attractiveness of other asset classes, such as fixed income.
As a result, less money is flowing into the ecosystem. This is leading to a much-needed reality check that might be better for returns in the long run but certainly brings short-term pain. Conversely, there’s not just less capital – there’s less deal activity. For example, at the end of last year, we saw the first month that no PE firm took a public company private.
Given the above, we’re seeing many managers using the current moment as a time to pause and reflect internally.
What should they be reflecting on?
No one knows for certain how long this current uncertainty will last, how much private equity will continue to stutter, and how today’s inflation and geopolitical risk will pan out. It’s tricky to strike a balance between paying a premium for an investment now and missing out on great opportunities because one was too cautious. However, to be fair, that’s tricky even in the best of times. The difference is that now it’s like trying to catch a falling knife.
What I’ve been hearing from many clients and fund managers is that now is the perfect time to look in-house and re-evaluate everything. Do I have the right staff in place? Do I have the right technology? Do I have the right infrastructure, CPA firm, fund administrator and bank? If the portfolio is not expanding right now, do we have what we need to support the current portfolio companies? There are a number of operational pain points that private equity funds suffer through when deal activity is abundant. Now is the time to address these pain points, while it’s relatively quieter.
A lot of managers are wading into these waters to see if their operations are working efficiently, with a hard look at their internal staff, service providers and even their tech stack. Making these changes is sometimes cumbersome in the short term, but the long-term benefits of getting your house in shape outweighs any short-term disruption.
Typically, GPs will do an in-house internal review before raising their next fund, but now, with fewer funds being launched, managers are asking those questions even when they don’t have an imminent fundraise in sight. As a rule, GPs don’t change providers often, largely because it’s a hassle to do so, and major operational change takes time and effort to execute properly.
We are seeing GPs reach out to us because the current uncertainty is affording them the luxury of time to get their house in order. The key is to find a partner that not only supports your administration needs but also helps you impress your investors and optimize operations in this time of rapid change.
What are some key areas to focus on for those GPs looking to ‘clean house’?
One key area is obviously technology. During the boom times, CFOs would simply add software or a platform as they needed one, often in addition to their outside fund administrators. As such, firms would often pile on vendors for the technology they needed, playing Frankenstein with various platforms and software to take care of their needs. The issue there is that these data sets often do not talk to each other.
The reality is that modern fund administrators with complete front-to-back technology stacks now exist, where managers can source a single, integrated solution without having to juggle four or five vendors in addition to the fund administrator. That’s what managers are approaching us to do for them now, so that they have the best institutional solution for when the market recovers.
Staffing is another area. I think it’s a great time for managers to make sure they have the right team in place. People working in this industry typically start working at a junior level at an established fund, but it’s hard to promote them unless someone leaves, or a role is invented. More often, the firm’s controller will leave to assume the CFO role at a newer fund, but those new funds aren’t getting launched right now. That means, as a firm looks at building a strong team moving forward, they might be able to recruit a higher-caliber candidate than they would have a few years ago.
That’s what this moment is really about: looking in-house to discern the best practices, staff, tech and outside help to be prepared when the industry rebounds. If history has taught us anything, it’s that this industry finds a way, time and time again, to come back stronger than ever before.