Sanne: The next normal

LPs are fine-tuning their approaches in the wake of covid-19 but their appetite for alternatives shows no sign of abating over the long term, writes Jason Bingham, chief strategy officer at Sanne

This article is sponsored by Sanne.

Jason Bingham

The private equity industry has demonstrated its adaptability through the ongoing pandemic, supporting existing portfolio companies as and when needed, while continuing to invest in new businesses that require capital and operational expertise to grow.

Although the outlook remains uncertain as governments tighten restrictions on people and businesses, private equity is well placed to help weather the tough conditions and emerge stronger. There is a continued focus from managers in providing scaled, flexible solutions to private companies, particularly in global direct lending, special opportunities, and alternative credit strategies.

The case for investing in alternatives continues to be very compelling. Investors remain frustrated with low interest rates and the dual challenges of high valuations and volatility in the traded markets. In addition, the long-term trend of investors consolidating their relationships among fewer trusted managers with a broad product offering is ongoing. From my perspective, there is a long runway for growth for our clients as their investor base looks to increase both their allocations to alternatives and LP fund commitments across their platforms.

Impact of the pandemic and cascading effects

As we navigate through a crisis of this depth and magnitude, there is always likely to be a market share consolidation for managers. There is an overarching secular trend in alternatives for the larger platforms getting larger. Unlike liquid markets where size can sometimes hurt performance, in alternatives, we have seen that the larger managers get, the more they can invest in competitive advantages and the better their performance is. We hear anecdotally that the smaller single asset managers are having a very challenging time raising capital in the work-from-home environment, whereas their larger peers appear to be enjoying significant success across multiple products.

Dealing with existing LPs is easier than trying to meet new LPs and new investment committees over video technology. In certain asset classes, like credit where you can take advantage of dislocation, LPs are showing a real appetite. For the most part, the largest LPs are very sophisticated. They have a plan, and they are fine-tuning it, but we are not experiencing or seeing any dramatic changes in their appetite or their desire to keep allocating and keep investing.

Overall, covid-19 has not had a significant negative impact on private equity operations. It took most managers a couple of days, perhaps a week, to switch to home-office mode and today things are very much working as smoothly as they did before coronavirus struck. Of course, there was an initial slowdown in dealflow, but now most due diligence is conducted remotely with the host of online tools that are available. Overall, the industry has been quick to adapt, and disruption has been minimal.

ESG factor

As we see new environmental and social themes developing, it is important to understand many managers have been focused on ESG considerations for quite some time, particularly following the global financial crisis. So, at this point, they have over a decade of experience in driving and protecting value through ESG management. Firms like these have ESG considerations integrated within their decision making, which is taking place every day within their deal teams and investment committees on a global basis. It is part of the mindset of their teams as they evaluate opportunities through ESG criteria and look to execute and create value.

Many managers are finding good investment opportunities to generate private equity-like returns while driving a positive impact at the same time. That will be the big opportunity as we navigate our way out of this pandemic.

Valuations, fundraising and deal activity on the rebound

We have seen real strength in companies focused in areas that have been given tailwinds from covid-19. Sectors such as e-commerce, gaming, mobile gaming, software, housing-related themes, healthcare and wellness are doing very well, whereas others, such as the retail and hospitality markets, are struggling. At no point did we see any of the panic reaction we saw during the global financial crisis. By and large, investors have maintained and more often increased their allocations and have continued investing across all strategies. We have seen a small shift favoring growth-oriented investments in some areas of the credit market, but not any significant changes in how investors are approaching the private markets.