In the midst of the COVID-19 outbreak, Intertrust conducted a study for their 2020 Global Private Equity Outlook report. Around 150 private equity fund managers based in North America, EMEA and Asia responded to the survey to give their views on the main challenges and opportunities the private equity industry is facing now and in the next 12-24months. Chitra Baskar, Global Head of Funds, provides her executive summary of the high-level findings of the report.
COVID-19 has dramatically impacted the sector outlook for the year, with many private equity firms, their investment strategies and portfolio companies being severely tested. Well over half (57%) of our respondents see the environment for private equity deteriorating over the next 12 months and of these, one in eight believes it’ll deteriorate “significantly”. Almost all respondents to our study – 92% – believe there’ll be an increase in distressed fund transactions over the next 12 months.
But we also found a large number of industry professionals remain positive. A third (32%) think the environment for private equity will improve and around half (47%) say they are optimistic the industry will be able to face the pandemic and, ultimately, come out stronger over the next 12-24 months.
In the context of record levels of dry powder – Preqin* reported at the start of the year that it rose for a seventh consecutive year to c. $276 billion in 2019, triple what it was in 2012 – it’s perhaps unsurprising that many respondents see a rise in opportunities and potential deals. Four fifths (79%) say that lower valuations present a buying opportunity for active investors.
There are three other clear trends we can distil from our survey, all of which, it could be argued, overlap with each other. Firstly, that Environmental, Social and Governance (ESG) considerations will escalate in importance, in terms of how firms run themselves and the companies they invest in. COVID-19 is widely seen as catalysing this shift as the world moves towards a ‘green is good’ mentality. Secondly, that the drive for greater transparency remains an absolute priority for firms and their stakeholders, particularly regarding portfolio performance.
And thirdly, that smarter technologies and digitisation will drive operational efficiencies and support the push for greater transparency – as well as investment opportunities. The vast majority of our respondents (84%) said they were optimistic that they’ll benefit from digitisation over the next 12-24 months, with 29% being “very optimistic”.
Digitalisation has come to the fore during the COVID-19 pandemic – think how online collaboration tools such as Webex or Microsoft Teams has transformed remote working. In terms of the sector itself, there’s been a normalisation of online due diligence, hosting of Annual General Meetings (AGMs), or the use of data rooms to share data with investors.
At Intertrust, we’ve seen interest in digital platforms through which static and dynamic information can be shared as well as actual documents as well as workflow tools.
For Intertrust, the changes impacting the sector have continued to drive the way we work with private equity professionals and support their business requirements and aspirations – particularly during times of profound disruption and market risks.
Our deep domain capabilities, coverage in more than 30 jurisdictions and leading tech-capabilities has underpinned our own business growth and expansion. New requirements such as the demand for virtual board meetings and digital signatures, as well as the need for online business activity monitoring and investor reporting tools are accelerating the digitisation of our own business (as an example, our GAAP consolidation tool). As financial markets move forwards, private equity firms are realising that outsourcing – fully or partially – is a key opportunity when considering their future operations.
As the private equity sector grapples with greater complexity and fund structures become more complex, we’re exceptionally well positioned to help our clients navigate through and benefit from such as a fast-changing world. Two thirds of respondents to our survey see a rise in early bird discounts and other deal sweeteners at first close by GPs to attract capital over the next two years. A similar number expect GPs to offer co-investment rights to LPs. Just under half say that there’ll be a rise in cross-border fundraising with GPs marketing to LPs in overseas markets. This will increase the complexity of the fund structure, which in turn increases operational complexity and regulatory obligations.
As such, Intertrust will remain a trusted partner for private equity firms, continuing to position themselves the forefront of the industry and helping clients to prepare for the ‘new world’ of private equity.