What will be the most significant factors impacting private markets over the next couple of years?
Covid is the big unknown, certainly. If we were to continue having lockdowns, that would impact many different sectors – some negatively, of course, but some positively. The way that we come out of this pandemic will have a significant effect on private markets over the next few years.
Beyond that, inflation, interest rates and stock market performance – all of which are interlinked – will be critical. Current public market valuations are the most significant factor in institutional investors’ asset allocation models. So, if the public markets remain highly valued, appetite for private capital will be high. But as soon as they fall, appetite for private markets will fall as well.
Do you anticipate building significant headcount in your portfolio?
Human capital is key. You can have a great investment, but if you don’t have a quality management team running it, you are not going to unlock the value creation that you would like. When we buy an asset, we always create a full potential plan, which includes areas where additional talent is required.
But once we have the right management team and skillsets in place, there is no focus on putting more people in for the sake of it. Rather, we look at improving the digitization of our portfolio companies to make them more efficient, particularly where labor costs can be high in some of the markets where we operate.
How is digitization impacting your own operations, as a GP?
Technology has become far more prevalent. It began with systems for reporting to investors. Then we saw the development of portfolio management tools. Not all that long ago, monthly management accounts were delivered in a pack, by email. Now we have systems which allow us to directly connect with portfolio companies and compile reports with all the data uniformly formatted, at the touch of a button. The next stage, I believe, will be more data analytics of portfolio company performance, which will improve our ability to add value.
Do you see the creation of that capability as a buy or build exercise?
We have used specialists to help us build a centralized warehouse. We extract data from portfolio companies and then we further analyze the information in our own environment. I think that is because we are still in an era where you need things built to your specifications. That gives you more control over the output. In five years, it may be possible to buy a product that does exactly what you want, but I don’t think we are there yet.
Do you predict greater automation in ESG?
While some target companies will be incredibly sophisticated around ESG at the point of acquisition, others will be at an earlier point in their ESG journey. We were an early mover with ESG integration, building spreadsheet tools which have the ability to adapt to specific requirements and are dependent on the sector and stage of maturity of a portfolio company.
More recently, we have invested in a tool to monitor the progress of our portfolio companies against their respective ESG key performance indicators. This still requires interaction between our team and portfolio company and is not yet automated. But while it will take a lot of legwork to get there, I do think it will become the subject of automation over the next couple of years.