Private equity faces conflicting pressures, with regulation and political tensions affecting fund managers’ decision-making process, according to the latest research from Vistra.
Its report, Private Equity: Where Challenges Meet Opportunities, says 71% of PE professionals believe demand for greater information flows is the most significant way in which investor behaviour is being changed or influenced.
Drawing on the insights of 150 senior executives across Asia, Europe and the Americas, this year’s research investigates the current state of play of the PE industry from the perspective of limited partners (LPs), General Partners (GPs) and legal intermediaries, and identifies predominant industry trends:
• Increasing demand for more information The volume of information required appears to be growing and becoming more diverse. Almost half (46%) of the interviewees are seeing actual data downloads used to create their own reports and analysis from raw data, while 51% said issues around transparency are creating demands for better-quality information. These data reporting demands are having an impact on the technological requirements within the business, recognised by 82% of respondents.
• Moving towards ESG and SRI investing The move towards environmental, social and governance (ESG) investing and socially responsible investing (SRI) is gathering momentum. While 63% of respondents said ESG/SRI helps drive new business and 62% believed it has a positive reputational impact on the PE industry, the most significant impact is the need for compliance (65%). This is expected to continue, with 82% of respondents believing Millennials and Generation Z will provide a new level of socially engaged investors.
• Evolving role of technology The PE sector is open to the possibilities offered by technology, with 85% of professionals agreeing technology could be a major enabler of change and 81% that new technology such as blockchain will have a big impact on the industry. The challenge arises when it comes to data management and integration across outdated legacy systems, and the lack of standardised software. The cost of in-house investment (67%) versus outsourcing technology services (55%) is a key decision facing the PE sector, with cybersecurity identified as the biggest threat for at least the next five years.
• Regulation, transparency and the move towards ILPA principles Increasing regulation (63%) and increasing transparency (59%) were considered the top market trends in PE – after demand for greater information flows (71%) – that are influencing investor behaviour. In particular, 63% believed the level of regulation will become more complex in the next three years. The survey also shows numerous forces in play when it comes to transparency. While the Institutional Limited Partners Association (ILPA) has published principles around transparency, only 32% of respondents are fully compliant, with technology (62%) cited as the key factor holding back GPs from achieving compliance, followed by experience/skill (62%) and cost to outsource (56%).
• Outsourcing is becoming standard Outsourcing is on a general upward curve, with an average of 72% of GPs outsourcing one or more functions to a third-party provider and 86% of those not doing so planning to within the next five years. This is largely driven by demands from LPs – 84% of LPs wanted their GP to outsource before they commit capital; 67% were keen to influence which provider GPs use. While the attitude to outsourcing is largely positive, with some of the main factors seen as access to technology and talent, and the ability to meet regulatory requirements, some barriers are still clearly in place, with cybersecurity (70%), lack of control (62%) and flexibility (58%) cited as the top concerns.
• Divergent views on key markets across regions When considering countries offering the biggest opportunities, the views of PE professionals slightly varied depending on where they are based. India (35%) was identified as most likely to be the next emerging market, ahead of China (25%) and Brazil (19%). However, from a regional perspective, Asian respondents had China in fourth place, behind India, Brazil and Mexico, while those from the Americas believed China tops the list. The US was seen by 65% as the most resurgent market and one that has become more domestic (64% of respondents), indicating a tendency for US players to stay closer to home. This seems to run contrary to Asia respondents, who are looking outside of the region for opportunities.
Onno Bouwmeister (pictured), Global Sector Head, Private Equity, at Vistra, commented: “Despite the understandable concerns shown by the research – notably around data demands, technology shortcomings and cybersecurity – the private equity industry showed clear optimism in a number of areas.
"Not only was co-investment flagged as a key trend in the market, along with the increasing number of debt options and a trend towards larger fund sizes, 55% of respondents also felt opportunities were being created more broadly. We believe drivers such as ESG and the move to transparency will keep the sector moving forward.”
To view the full report click here