What are the biggest challenges facing the private equity industry and what are your organizations doing to help?
Sommers: Educating lawmakers, the media, and the general public on what private equity is, and what it isn’t, is still an issue facing the industry.
However, we are working hard to champion all the good that private equity does, explain the basic private equity model to these stakeholders, and show how we are different than other forms of investing.
A problem that is impacting the industry is the increased complexity around the functions within private equity firms, such as compliance and investor relations roles, which have become more regulated. When this happens, best practice and knowledge-sharing needs to occur so we are on the cutting edge.
We have formed eight committees and working groups designed to share information, provide guidance, and create networks among our member firms. We gather consensus on the challenges our member firms are facing, and then work to be both their resource and their advocate.
Höppner: The European financial services industry is regulated by more than 40 pieces of EU law and many of them will have a direct or indirect impact on our industry. For example, the European Securities and Markets Authority is reviewing the potential of a marketing passport for some non-EU entities. Even for current European passport holders there are issues; in practice the internal market passport doesn’t function as intended in some jurisdictions, which are still imposing additional fees and charges.
We regularly liaise with the EU institutions and work with them during policymaking to represent our members’ concerns.
The Alternative Investment Fund Managers Directive has been an ongoing discussion for many years and it will continue to be. We are actively engaged in ensuring it stays on track, especially with regards to the passporting issues and the review due in 2017.
Are there any key trends you’re noticing?
Sommers: From a deal perspective, investments will remain challenging as firms seek opportunities in a high-valuation landscape. In a recent study we conducted with EY, nearly three-quarters of our larger firms cited finding investment opportunities as their most significant challenge in 2016. Perhaps as a result, we have noticed that investment strategies continue to diverge between large and small firms.
Höppner: It is more challenging for investors to generate returns in today’s low-yield environment. Recent reports have shown that institutional investors such as pension funds are moving more into the alternative asset classes, including private equity, in a bid to escape market volatility and increase returns.
There are also concerns of a new tech “bubble” and while our members need to be careful not to pay too much, tech company valuations are a fraction of what they were ahead of the dotcom crash. Today’s successful start-ups are experiencing impressive levels of turnover, and strong and sustainable growth.
Are smaller firms bearing the brunt of regulations?
Sommers: Smaller firms are more likely to feel the impact of the transitional costs. However, I think a smaller firm, if guided appropriately and prepared for the regulations that lie ahead, can stay competitive and work through new regulations.
As the trade association for the entire industry, we are cognizant of the impact of regulations from our smallest member to our largest member.
Höppner: The EU regulator took the cost of compliance for smaller funds into account by making sure the AIFMD regime only applies in full to funds with assets under management above €500 million.
But this meant fund managers below this threshold that want to market cross-border only have two options at the moment: either rely on national private placement regimes, some of which are already being phased out, or to comply with the AIFMD regime in full – a regime that is clearly not designed for them.
What are going to be the biggest issues facing the industry over the next five years and what can firms do to prepare?
Sommers: The regulatory issue that our industry faces – both domestic and international – continues to expand. Our member firms should be ready to push back if they sense regulatory over-reach, and in the meantime they should seek guidance on the current environment so they can understand what may be coming next.
Höppner: While there is substantial appetite for private equity, investors are being more selective in their commitments as they seek the best returns, which could prove challenging for emerging managers and first-time funds.
LPs are likely to continue to want more co-investing opportunities, transparency and tailored reporting from firms. Meanwhile, technological solutions could improve operational efficiency and reporting at all levels of fund and portfolio company management.
AIFMD is also due to be reviewed next year, so the industry will need to stand ready to contribute to that.
Why did the Private Equity Growth Capital Council change its name to the American Investment Council and what should the industry expect from this rebranding?
Sommers: In my first month at the council, I took our staff on a retreat and began the day with a seemingly simple question: Are we operating as the best possible advocate for private equity and its current industry trends? From the conversations that followed, our team developed an updated mission statement to articulate why we exist as a trade association.
We decided to expand our focus to cover the growth strategies through partnerships, alignment of interests, and long-term investment. And while we will stay within the private equity space, we will spend more time highlighting and explaining the benefits of the various fund types in this industry, such as real estate and infrastructure funds.
The industry can expect improved value from the AIC. It is more than a name change.
Invest Europe changed its name from the European Private Equity & Venture Capital Association last year – has this been useful?
Höppner: Since our name-change, we believe policymakers and regulators now have a better understanding of what we do and who we represent.