This article is sponsored by MUFG Investor Services.
Now that we are over one year into the global pandemic, there seems to be a light at the end of the tunnel, with countries rolling out mass vaccination programs in hopes of returning to some degree of normalcy.
This seemed like the perfect time for MUFG Investor Services to team up with Private Funds CFO to survey managing partners, CFO, COOs and CIOs to assess the impact of covid-19 on the private funds industry: how has it affected capital raising plans? What are the operational implications? And what are the market drivers for the coming year?
At the start of the pandemic, 89 percent of GPs believed fundraising would be difficult, according to a survey by affiliate title Private Equity International last year. This was reflected in the end-of-year data with capital raising dropping 19 percent to $535.2 billion and fund closings falling to 2015 levels, according to PEI’s 2020 Fundraising Report. But the big were getting bigger with the 10 largest managers accumulating about a quarter of all funds raised last year. What impact would this have on the outlook of managers and LPs heading into 2021 and beyond?
The Private Funds Leaders Survey 2021 paints a picture of an industry that has adapted quickly to the new investing and operating environment. Concerns about a regime change in the US, global debt levels and leverage have taken a back seat as interest rates have remained relatively low and the private investment landscape remains favorable.
Even as the public markets continue their recovery, the private asset community is attracting inflows of capital and many GPs are confident that this trend will continue as evidenced by 71 percent of respondents believing that fundraising will increase in the next 12 months.
Given this confidence in fundraising, a large majority of GPs expect to increase their headcount in 2021.
Our leaders’ survey shows that GPs have mostly stuck with their heritage strategies as almost three-quarters of respondents state that they will not introduce a new approach. This is a critical factor in maintaining continuity and focus during the pandemic. In this same vein, respondents understand that the need to retain and nurture top talent, deliver on their value creation program, improve their technology and effectively control costs are the most important operational considerations to ensure a successful portfolio company investment lifecycle.
The rise of outsourcing
The pandemic has forced managers to look inward at their operations and LPs are assessing the operational scale of the managers they are investing in. Managers must assess where they will spend their organizational capital – on value creation or on their operations. The survey reveals that institutional investors and asset owners are asking the same questions and are putting pressure on GPs to outsource at least part of their operations. Fund accounting, tax and IT take the top three spots in the survey. Most GPs are reticent to change, with the majority responding that they do not expect to increase outsourcing.
Another area that has taxed the resources of the manager is the dramatic increase in LP data requests and regulatory reporting.
Fund financing was a very hot topic in early 2020, but investors’ concerns of overuse of these facilities appears to have waned. Eighty-five percent of respondents say that they use capital call facilities and the overwhelming majority expect that trend to continue or increase over the next 12 months. Banks, including MUFG, continue to be the largest players in the space.
The ESG imperative
The pandemic has renewed focus on societal issues and how firms address privacy, diversity and corporate responsibility to drive sustainable performance and add shareholder value. Environmental, social and governance issues lie at the forefront of LP due diligence, and GPs continue to define and refine their vision and reporting related to ESG, with 77 percent of private funds leaders agreeing or strongly agreeing that a strong focus on these areas will create value.
ESG reporting on private investments remains a challenge for managers as the process of gathering and consolidating data is fully manual, and many firms are looking to outsource these functions to their service providers. MUFG Investor Services has recognized that this is both a new challenge and opportunity for our clients and have created an ESG solution that analyzes, gathers and aggregates data for both public and private markets to ensure the most robust coverage of a client’s portfolio across all asset classes.
The EU Sustainable Finance Disclosure Regulation (SFDR), became effective on March 10, 2021. The SFDR imposes sustainability-related disclosure requirements on financial services institutions such as banks, insurance companies, pension funds and investment firms. European managers and companies are faced with reporting requirements that will become increasingly complex as SFDR goes through several phases through to 2024. The survey reveals that only 15 percent of the respondents are fully prepared to make those filings.
Overall, private markets have survived and, in many ways, thrived in the aftermath of the initial shock of the pandemic. Some challenges remain: What level of outsourcing makes sense? How do firms handle increased data requests from LPs? How will firms comply with upcoming regulatory reporting for sustainability and ESG?
But most respondents have a positive outlook on the sustainability of the recovery, fundraising prospects and their own growth outlook. The large managers have and will continue to attract a high percentage of investment allocations. The outlook for a continued low interest rate environment coupled with public and private capital outlays will keep the global economy buoyant, thereby creating opportunities for investment.