Industry practitioners recently met virtually and in-person at alternative investment conferences in London, Luxembourg and New York to exchange views on private markets. BBH alternative fund services specialists attended these events. Read the full report to find out what will drive growth.

Energized and exhausted are two adjectives that don’t normally go together, except when used to describe what it’s like returning to in-person conferences again after a pandemic-induced hiatus. In November and December, practitioners from the alternative funds industry took a break from their computer screens, where many had watched virtual events, to feel the buzz of connecting with others for real at live gatherings. This left many attendees exhausted at the end of the day but mostly excited to be part of an industry that is changing fast, and for the better.

With the pandemic elevating diversity and inclusion (D&I) to the top of the boardroom agenda, conferences for women in private equity, venture capital, private credit, real estate, real assets, and infrastructure are now de rigueur. The Women’s Private Capital Summit in New York from Nov. 18-19 and Private Equity International’s (PEI) Women in Private Market Summit in London from Dec. 1-2 both hoisted diversity and talent to the top of their agendas, while PEI’s CFOs & COOs Europe Forum in London on Nov. 16-17 and ALFI’s Private Equity and Real Estate Conference in Luxembourg from Nov. 30 - Dec. 1 (which, at the last minute had to switch from a hybrid to a fully virtual event) also hosted panels and presentations on D&I and gender smart investing and financial inclusion.

Since talent and diversity are firmly on the industry agenda, a diverse group of BBH representatives in the alternatives fund servicing team from London, Luxembourg and New York attended the events and reported on how these and other themes are shaping private markets. 

Diversity & Inclusion to Matter Even More

Kicking off the event season, in November, PEI’s Perspectives 2022 study¹ revealed 20% of limited partners (LPs), or investors, refused a fund investment opportunity based on a lack of commitment to D&I at the level of a general partner (GP), which manages the fund’s committed capital. This is a stronger trend in Europe than in the US, notes Ainun Ayub, BBH’s Head of Alternatives Product for Europe and Asia, who attended PEI’s CFOs & COOs Europe Forum.

However, D&I will continue to occupy investor LPs’ minds and they are not just looking at the current situation but also the manager’s future plans. To that end, LPs are increasingly performing D&I due diligence at a portfolio company level, as well as at a fund level. 

On the importance of attracting the right talent, GPs are understanding that people with knowledge of areas such as regulatory compliance and operations are key to furthering more international investment. “It’s a long-term play and GPs realise that they need the right talent internally to help with what it actually means, from a regulatory and operational perspective, to hold an international investment,” observes Meghan Palleria in the Relationship Management team in BBH Boston after attending the Women’s Private Capital Summit in New York.

These conferences also noted that the pandemic had contributed to a shortage of talent across all players in the industry including asset servicing providers, fund managers and management companies. “One of the main concerns of people for the next year was about attracting and retaining talent due to an apparent thin pool of resources across the industry currently,” shares Goretti Negueruela Miragall in the Relationship Management team in BBH Luxembourg after attending the ALFI conference. “It’s a struggle across the board and in the industry, globally. Due to remote working people do different jobs in different jurisdictions. So, everything is fluid right now.”

Interest to Grow in Resilient Private Markets

PEI’s Perspectives 2022 Survey of LPs noted the resilience of private market portfolios, including private equity, in the face of such a turbulent year. Private equity funds raised around US$535.3 billion in the first nine months of 2021, the highest fundraising total for this period since the global financial crisis, PEI data shows. Some 93% of investors intend to invest more or the same amount of capital in private equity over the next 12 months.

At the Women’s Private Capital Summit in New York, it was clear that everyone is looking for alpha everywhere. “LPs understand that alpha might not be in the traditional space but in other asset classes such as art, litigation finance and non-fungible tokens, leased aircraft, or unsponsored credit investments,” notes Meghan.

ALFI’s Real Estate Survey 2021 and a joint Private Debt Survey (ALFI and KPMG) on Luxembourg released at the Private Equity and Real Estate Conference backed this up, with statistics revealing:

• An increase in real estate assets in Luxembourg of 14.83% over the past 12 months - current market size for regulated structures EUR 104.4 billion².
• The number of surveyed real estate investment funds (REIFs) grew by 69, bringing the total to 518 surveyed vehicles.
• Assets under management in private debt funds in Luxembourg increased by 40.6% in 2021 to a total of EUR 181.7 billion. 
• 36% of private debt funds are structured as Reserved Alternative Investment Funds, an increase of 16% compared to 2019³.
• 81.5% of private debt fund initiators are from Europe, 18% from North America and 0.5% from the rest of the world.

At the Women in Private Market Summit in London, delegates heard that fund raising continues to rise throughout Covid despite taking longer with the need to have more frequent closings. “Existing LP/GP relationships are key for successful capital raising with LPs still preferring personal interaction rather than virtual meetings, prior to investing,” shares Lata Vyas in the Alternatives Product team at BBH London.

This all means that at an operational level, with scale becoming an issue in private markets, firms are considering outsourcing as people with the right skill sets are increasingly hard to find and technology demands have accelerated, PEI’s CFOs & COOs Europe Forum delegates heard. Managing data – systems infrastructure, flows, reporting, and re-orienting the organization to become data centric while growing at speed are hugely important, adds Ainun.

Getting Creative: Co-investing to Chase Fewer Deals

With the rapid growth in private markets, both in terms of size and importance in recent years, finding accreting deals is a prescient challenge. Even companies with high valuations require more capital. So private equity managers are at pains to be more creative to generate returns by rolling out new funds, by holding onto stakes and companies longer and by entering new industries. “So, as they think through their growth and expansion, the questions they ask are: is it international? Are we adding new assets, asset types or investment types to our fund ranges? And how are we going to source capital, whether that be private credit or from investors?” observes Meghan following the Women’s Private Capital Summit.

These questions are steering managers towards more creative ways of investing, such as co-investing. Co-investment strategies, involving a fund investment with additional funding from interested LPs in addition to existing relationships those LPs might already have, are becoming increasingly popular as LPs continue to invest more in private markets and the competition for access to good deals that are larger in size intensifies. With this increased capital flow and fewer deals, managers are offering more attractive co-investing strategies. In a Covid world, where buyers are less likely to change their suppliers, these strategies work better when an LP is more familiar with a manager, or is expanding their relationship with a known manager, notes Lata. These strategies enable LPs to expand their manager universe within their existing small, highly skilled teams.

A key takeaway from the Women in Private Market Summit in London was that LPs are in both co-invest fund strategies, as well as at a transaction level. Existing LP and GP relationships usually work better as the time to close is usually tight, as short as one month for due diligence and approvals, notes Lata. “The industry is seeing a blurring of the lines between co-investments and secondaries as continuation funds (new vehicles that are set up to take on the portfolio investments of funds that are nearing the end of their lifespan) are increasing in number. Syndications are also popular with LPs however less so with GPs who see them as a lower fee proposition.”

Secondary Markets Continue to Grow

GP-led secondary fund restructuring transactions of an LP’s existing private fund and/or holdings are becoming more commonplace in the private equity industry, particularly in the last five years. These are oriented towards solutions, such as providing liquidity for LPs or securing a pre-emptive extension of the fund term to maximize value of a fund’s assets. These comprise continuation funds with Unicorn assets (including privately-owned start-ups), with even up to three or four fund cycles.

PEI’s LP perspectives study 2022 predicts substantial growth in the secondaries markets: 52% plan to commit capital to private equity secondaries funds in the next 12 months, the highest level since 2019’s 53%. LPs are growing more comfortable with selling in the secondary markets, notes Lata. “These markets are no longer associated with underperforming portfolios but rather as a mechanism to reallocate as more primary opportunities emerge.”

Single asset secondaries, which are akin to co-investments, are attractive to LPs as they provide them with the opportunity to get closer to the direct asset. “Continuation funds or series are gaining popularity, although questions are being asked around the rationale for the Continuation. Nonetheless, they are a great tool for LPs needing liquidity.”

ESG Integration on the Rise

ESG integration within private markets is also on the rise as managers move to integrate Sustainable Development Goals (SDG) within the full investment cycle, attendees at the Women in Private Market Summit in London heard. “There is a shift in mindset with ESG integration seen as a source of long-term value creation, therefore achieving better exit rates and returns,” noted Lata.

The energy transition initiative has created a significant opportunity for Infrastructure investing, delegates at the Women in Private Markets Summit heard. Specifically, the impetus of the COP26 goals will drive pension funds to increase allocations as they set their decarbonization goals. “It’s a US$100 trillion of investment opportunity which will be in new technology-based energy solutions and not just wind/solar,” says Lata⁴. “Deployment will be harder as the competition to gather assets increases – but this could possibly be an opportunity for co-investments.”

Meanwhile, reflecting on the takeaways from the PEI CFOs & COOs Europe Forum, Ainun notes that the continent is much further ahead in terms of how its integrating ESG and that it is a must to attract investors and talent. “There is a lot of focus on the “S” in ESG in the context of the new Sustainable Finance Disclosure Regulation (SFDR) in Europe. SFDR compliance and categorizing funds into Articles 6, 8 or 9 definitions is subjective and time consuming, yet necessary, as demand by investors for funds that comply with Articles 8 and 9 is strong,” she says.

Survey findings released at the Forum reveal that 72% of managers and investors said they are not tracking ESG data yet, given the variety in the data taxonomy that's required. “But as reporting requirements become more defined, particularly in Europe, it’s becoming more real for fund managers and they’re starting to pay more attention to it,” reflects Vyas. “US managers seeking to diversify across Europe and launch cross-border products should start adhering to the transparency and reporting requirements of the local regulator now.”

Stewardship Directs Impact Investing

While regulation directs ESG investing, impact investors are exerting greater influence over companies and this stewardship is helping to boost the flow of money and capital to private markets for positive social results.

Impact funds are no longer seen as concessionary investing and while the key objective is to generate impact, correlated returns are necessary to attract more investors. “However, the quantification and measurement of impact proves to be challenging in certain themes, especially social impact requiring specialist valuers and a boots on the ground approach to measure impact” says Lata.

Government sponsored funding is beginning to slow down post pandemic (for example the Fed says it expects to slow asset purchases which it has used to support the economy⁵,) and this is creating opportunities for impact investing.

“Digitization and technology are key impact drivers. In addition, investors expect impact results to be linked to the fund level remuneration, this requires full transparency into KPIs from the underlying portfolio companies which can be difficult to achieve without the appropriate metrics and tools,” says Lata.

Due Diligence and Fund-Raising to Get a Virtual Boost

In today’s still largely virtual world, where many interactions happen over virtual communications platforms, due diligence has changed. “Instead of the investment management team going to pitch their strategies, virtual meetings mean that managers are getting access to operations and compliance team members during due diligence now,” notes Meghan. “They find that to be really important to understand the entire process and return stream.”

“Fundraising now involves much more of the organization rather than just the investment relations people and that is appreciated by the investors, because they actually get much more information.” It also leads to more transparency about how many people are part of a team. “On virtual calls there is more transparency about how many people managers have working for them. Since physical meetings haven’t been possible, managers must showcase their people and what they’re doing.”

Windows of opportunities for travel and physical meetings continue to open. Going forward, however, LPs anticipate a hybrid model combining virtual and face-to-face meetings for due diligence of investments. “This is still an ecosystem based on relationships,” concludes Ainun.