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Magazine Issues » November 2022

Roundtable: Private equity in a new decade

Funds Europe – Some big buyout firms have seen a decline in their private equity assets in recent quarters. Is that a blip or a trend, given they were at record highs in deal terms in 2021?

Nicoll – It’s more nuanced. If funds are using very cheap debt and excess liquidity to drive the fund size, that is going to go. Assuming we’re talking about sensible expertise, it continues to grow. We’re in an extraordinarily exciting time – we have to completely redo the world’s infrastructure, and a lot of it will be done through emerging technology, which will be backed by private equity, VC and private lending.

We’re hitting what looks like a credit cycle for the first time for a very long time, the long-term trend should remain intact. It wouldn’t surprise me to see significant changes in the asset sizes – but that may be a reflection of very large asset-raising before. Looking at the long-term trend, you could argue it had gone too high, and we are now coming back to normal, trending steadily upwards.

Funds Europe – Is the process of valuation of private assets an issue? Some of the market volatility earlier this year revealed the need for more timely market information?

Degosciu – Listed private equity has a big advantage. Due to the listing rules, listed private equity companies are obliged to publish any significant event and make a new investment when there is a significant change in the valuation. We track all the latest information from listed private equity stocks and access a daily valuation of their underlying investments.

More transparency is coming. Regulators are asking insurance companies and pension funds to have a more actual or timely valuation of their closed-end investments as they don’t believe NAVs are stable over a year and they may have to make an adjustment.

Pesch – Private equity managers are not black boxes. Transparency has increased a lot, including communication, reporting, closer GP-LP [limited partner] relationships. But creating value takes time and it is normal that you could not update the valuation of unlisted companies too frequently. With the other private equity associations and Invest Europe, we use the IPEV guidelines on valuations – which were updated during Covid –and GPs are also helping out and making them even more efficient, better and stronger.

Tidswell-Norrish – There’s always been a significant lag by virtue of the process. Through the power of financial technology, we are going to see examples of how to improve reporting and make a better, more transparent industry.

Allright – In other private asset classes, there is pressure to actually stress [test] the portfolios or look at what would happen in certain events. That helps management understand the drivers, especially in multi-private market portfolios.

From a service provider perspective, it’s aiming to move as close to a daily environment as possible using efficient technology tools to engage with GPs when transactions get booked and represented in accounts. We aim to support more up-to-date and frequent reporting in the back office; in the front office we aim to provide more timely decisions to support the investment process.

There’s a long way to go. In hedge funds, you can get pretty good valuations across most strategies; private markets are a lot more inefficient.

Nicoll – Regulators are very keen on transparency, as are we. But daily pricing of an asset where you don’t have price discovery is not actually particularly useful.

There is a real issue about price discovery. The discussion about data is necessary, but by itself isn’t going to give you the price discovery you need. You need a secondary market, and transferability to allow you to then get that sort of price discovery and getting closer to the real world.

Are valuations as regular and as quick as people would like? No. Will that get better? Yes. But how much of it is useful if you really are going through funding rounds and one of those funding rounds is once every two years? I’m not sure whether it is.

On transferability, are you seeing more use of tokenisation? It’s certainly something that we’re seeing in real estate. If you can tokenise a building, that changes its transferability quite extraordinarily.

Tidswell-Norrish – It’s still relatively nascent but you can absolutely expect there to be moves towards having funds with a digital footprint, so you create better transferability, better immutable audit trails, better governance, better everything.

We have underway a project around digitisation of the industry that includes tokenisation, data aggregation and the application of it to the full fund lifecycle; think of it like a supercharged fund admin capability. So, there’s a lot happening in the background.