Future Flows: The next generation of private equity LPs

P R I VAT E E Q U I T Y W I R E

Fu t u re Fl ows :

T HE NEXT GENERATION OF PRIVATE EQUITY LPS J A NUARY 2022

I N S I GH T R EPO RT

IN S IG H T R E P ORT

KEY FINDINGS Private equity fundraising nears USD 1trn milestone Over USD 810m was invested in private equity funds globally this year, driven by historically low yielding fixed income strategies and volatility in the public equity markets. But in this year’s congested fundraising market, larger brand name managers are capturing re-upping LPs quickly GPs are diversifying their sources of capital Private wealth and family offices, particularly in richer Asia countries, are being pulled increasingly into buyout and venture; GPs are acquiring wealth managers and partnering with insurance companies to get closer to these allocations; and retail investment channels are expanding online Closer scrutiny from regulators in the US and Europe is coming As the investor pool widens for private equity, so does systemic risk. The U.S. Securities and Exchange Commission (SEC) in January proposed faster reporting and greater disclosure by private equity funds through the Form PF. Advisers to funds are also included in the plans LPs are looking beyond technology-based fund strategies Specialised fund managers in tech and healthcare buyout experienced a bounce during the pandemic, but LPs in private equity funds are increasingly looking for opportunities to invest in impact funds, special situations and the secondaries market DC pensions are being unlocked by governments Defined contribution (DC) pensions are set to become dominant investors in private market funds within the next two decades, as investment consultants seek to access this relatively untapped market. Government policies are also nudging forward older defined benefit schemes too

CONTENTS 3

Asset Allocation

6 8 11

Fundraising New Investors Regulation

14 16 19 21

Interview Strategy Asia Technology P R IVAT E E QU IT Y W IR E IN S IG H T R E P ORT

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A S S E T A LLOC AT ION

RISE IN PRIVATE EQUITY ALLOCATIONS LO O KS U N STO PPA B L E , FO R N OW

Every investor class wants to boost their private equity allocation in the hunt for yield.

But a crowded fundraising market in 2022 leaves the fastest returning managers with the upper hand, and others wondering how long the party can last

T

he pandemic has been kind to private equity. With returns at near record levels and far overshadowing those from fixed income, institutional investors hunting for yield have also realised the relative stability on offer in comparison to more volatile public markets.

Over USD 810bn was placed into private equity funds by investors in 2021 – the highest amount on record, according to data provider Preqin.

With capital still flooding into the market, the amount raised in 2022 will be “unprecedented”, says Sarah Sandstrom, head of North American private equity at placement agent Campbell Lutyens.

Though the start of the pandemic in 2020 forced some institutional investors to pause on new allocations to alternative investments, last year saw renewed optimism for private equity, an

acceleration through virtual fundraising and a re-balancing of portfolios in favour of the asset class.

Holdings of private assets are expected to rise 60% between 2020 and 2025. Private equity is showing the most growth and will account for nearly 70% of alternative AUM by 2025, says Preqin.

Fast pace

In a survey of LPs published at the end of last year by Intralinks, it was found that the vast majority (around three quarters) would be increasing their overall allocation to alternatives (which includes private equity) over the coming 12 months.

One-third of LPs surveyed expect this to be a three to five percent increase, while one in four plan to increase their exposure by 10 percent

or more.

“LPs are staying the course on their [private equity] pacing plans – increasing their allocations in some cases – a clear sign that investor interest in this asset class remains strong,” says Lindsay Creedon, partner at StepStone Group. “As the economy continues to show signs of recovery and growth, we foresee another robust year for fundraising in 2022.”

Increasing allocations makes financial sense: institutions with a larger allocation to private markets typically experience higher returns, according to research published last year by Cambridge Associates. In the past decade, those with a private investment allocation of at least 30% have outperformed those with an allocation of 10% or less by 200 basis points, it found.

But as interest increases in private

Investors are shifting from stocks into alternatives 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Stocks

Bonds

Real Estate

Other Alternatives

Private Equity Source: CEM Benchmarking

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equity, some fund managers are looking at the flows and quietly asking ‘how long will it continue?’.

“Whether or not that growth continues is still an open question,” says Peter Witte, associate director, private equity at EY. “But I don’t think that private equity firms are sitting there just waiting for that to happen. They’re actively out there looking for new sources of capital.”

Speed limits

Institutional investors such as pension funds and insurance companies typically maintain a relatively lower exposure to alternative investments in private markets as they are more closely regulated, giving them less flexibility to deploy capital. These institutions also typically have longer dated obligations that historically have been met with large investments in fixed income.

Three things have changed in the past 18 months: more online pitching during successive lockdowns has accelerated fundraising cycles; pension funds have been setting more aggressive private equity allocations; and GPs have been creating more liquid fund structures to unlock new sources of capital.

Among US pension funds, the portion of real-estate and hedge-fund

investments has been falling for the past three years as private equity has been rising. Their private-equity investments swelled to an average 8.9% of holdings in 2021 after three years of straight growth, says Preqin.

At the end of last year, one of the world’s largest pension funds, the California Public Employees’ Retirement System (CalPERS), increased its allocation to private equity from 8% to 13% over the next four years, equating to around USD 25bn additional investment based on current AUM. The US administration’s Build Back Better plan is expected to generate a flurry of private infrastructure investment opportunities tempting even more institutions into the space.

New policy guidance and legislation is nudging forward pension plans in other countries, from Switzerland to South Korea (see page 11).

Middle East-based institutional investors with deep pockets have also been moving into the asset class and pension funds in Germany and Italy are currently being targeted by UK-based private equity funds as the race for capital heats up, says fund managers.

Though highly contested, efforts by private equity funds to tap such large institutions will continue. The landscape is relatively well mapped by

fund managers and the largest pension funds (over USD 134bn AUM) currently allocate the least to private equity as a proportion of their total asset mix, according to data published last year by the OMFIF. One Canadian pension plan which has increased its private equity allocation from 7.5% to 15% since 2009 believes that a 25% allocation could be achieved by some of the more mature pensions, through a mix of fund and direct investment.

However, it is worth noting that some of these larger pension funds may currently be overweight to private equity due to outperformance over the past two years and therefore unable to deploy capital. Others – as in Canada, Australia and parts of Europe – may also directly in the asset class, without the use of fund managers.

For these reasons, many GPs in Europe and the US are turning to other sources of capital where the hunt for capital is picking up pace: private wealth and retail investment (see page 8).

Family affairs

There are an estimated 7,300 single family offices worldwide responsible for around USD 5.9trn. Around eight out of 10 have some form of private equity investment, allocating around

Family offices allocate most to alternatives, on average Family Of ce - Single Government Agency Family Of ce - Multi Sovereign Wealth Fund

Investor Type

I don’t think that private equity firms are sitting there just waiting for growth to stop. They’re actively out there looking for new sources of capital

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A S S E T A LLOC AT ION

Foundation Wealth Manager Public Pension Fund Superannuation Scheme Private Sector Pension Fund Bank Insurance Company 10%

20%

30%

40%

50%

Average Allocation (%) Source: Preqin, 2022

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A S S E T A LLOC AT ION

Global alternatives AUM to surpass USD 20trn by 2025

LONG LIVE ‘PERMANENT CAPITAL’

22 20

expected to increase their

accelerate in 2022, following

14% from 11% over the next two

acquired Global Atlantic Financial

allocations to private markets to years in the hunt for yield and

more environmentally focused

investment, said BlackRock last year.

They have typically been

among the more conservative.

The introduction of Solvency II rules in 2016 – which treated

private equity as ‘high risk’ and

required insurers to hold relatively higher levels of regulatory

capital – didn’t help. Yet despite

a planned revamp of Solvency II

from both the UK and EU (flagged last year) some of the larger

private equity groups have taken

another route to access insurance flows instead, by acquiring stakes in their businesses.

Over the past 24 months,

private equity sponsors have partnered with or acquired

insurance companies not as

portfolio companies, but as a

source of permanent capital for other investments.

recent moves from KKR (which Group), Carlyle (with Fortitude) and Blackstone (acquired a

minority stake in AIG and agreed

to manage USD50bn of AIG’s life and retirement portfolio).

Apollo already receives more

16 14 12 10 8 6 4 2 0

0 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25

The trend is expected to

20 1

Insurance companies are

AUM (USD tn)

18

than half its AUM from permanent capital vehicles, with insurance

AUM (USD tn)

Forecast

Source: Preqin

firms Athene and Athora

accounting for over 90% of that

number, according to Pitchbook.

More recently Athene Life Re has invested in FWD Holdings – a

Hong Kong-based life insurance company – alongside Canadian

pension plan CPPIB and others.

Permanent access to long-term

and sticky inflows ultimately

takes GPs beyond the traditional

10-year fund lifecycle and makes them less reliant on traditional

fundraising. Such large GPs are essentially the merchant banks

of the future, says one placement agent.

16% of their portfolios on average (split 9% direct investment and 7% funds), according to UBS data from 2020.

Following a decade of booming private wealth their risk appetite is by far the greatest among all investor types and is growing still, say placement agents and fund managers globally.

Almost a third of those surveyed by private client business Connection Capital last year said they plan to increase their exposure to alternative assets over the next 12 months, with the majority favouring private equity (66%). Unsurprisingly, their main motivations were to diversify portfolios and achieve outsize returns.

“Appetite for alternative assets

among private investors has been growing steadily for some time, echoing what’s been happening among institutional investors,” Connection’s managing partner Claire Madden said of the findings. “Now is an opportune time to increase exposure to alternatives. Market conditions are creating some very attractive opportunities and post-downturn vintages are known to outperform.”

But while it is true that more money is being allocated to private equity globally across almost all investor types, it is not being spread evenly across the fund managers out there and 2022 is set to be the most competitive fundraising market yet (see page 6).

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F U N D R A IS IN G

Luytens.

Through the first nine months of 2021, around half of private capital raised overall was done via such mega-funds, according to data from Pitchbook. These mega funds include Hellman & Friedman’s 10th flagship buyout fund (USD 24.4bn), Silver Lake (USD 20bn) and EQT, with two funds each topping USD 18bn.

Mega funds

The dominance of these mega-funds is set to continue this year with The Carlyle Group’s latest flagship fund targeting USD 27bn, making it the largest private equity fund in history, KKR’s USD 17bn North America Fund XIII and Partners Group’s fourth buyout vehicle, targeting USD 15bn.

In total 15 managers intend to raise private equity funds of at least USD

15bn in 2022, according to private markets consultant Hamilton Lane.

Fifteen of the 16 largest European funds (over EUR 5bn) are either back fundraising or will be in 2022.

The fundraising market in 2022 is set to be so congested by the larger funds coming back to the market more quickly that placement agents say some smaller GPs would be better to simply concentrate their efforts on pre-marketing funds for 2023.

One placement agent, who asked not to be named, likened the mood in 2022 to ‘The Hunger Games’.

In 2017, private equity funds waited an average 4.8 years before coming back to market. Today, they wait only 2.9 years. With the growth of fund platform extensions, it has become a perpetual cycle for many of the largest GPs with most rarely out of the market.

Private equity fundraising at record level 1400 1200 1000 800 600 400 200 0

4 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21

The private equity fundraising market in 2022 will be the most congested yet – with 15 funds returning to raise more than USD 15bn each.

Where does that leave everyone else?

T

hough the level of capital flowing to private equity funds is increasing, the number of funds receiving these allocations is not.

What began as a ‘flight to safety’ during the pandemic has now become a ‘flight to quality’ for many of the new LPs entering the market.

The number of private equity funds raising capital peaked in 2017 and was down by around 700 last year to 2,445, according to Preqin data. Over the past two years, new investors and those with resource constraints are entrusting their capital to larger, more established managers with vehicles of more than USD 5bn in size.

“It can take some LPs a while for their programmes to get beyond the well-known brand names and invest deeper into the market, sometimes 10 years,” says Andrew Bentley, a London-based partner at Campbell

20 0

BRAND NAME MANAGERS M O V E Q U I C K LY O N RE-UPPING LPS

PRIVATE EQUITY

RENEWABLE ENERGY

INFRASTRUCTURE

PRIVATE DEBT Source: Preqin Made with

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The key question for GPs in 2022 will be ‘what percentage of allocation do LPs have for new relationships?’

But for those GPs on the receiving end of increasing allocation flows in 2022 or converting LPs from their other fund products, the first shock of the pandemic has provided another lesson: be prepared for change.

“I think something we’ve learned is that anything can happen and so we should remain really, really careful,” says Goupil.

The USD 2bn club: LPs with largest PE commitments in 2021 New York State Common Retirement Fund California Public Employees' Retirement System Virginia Retirement System

Be prepared

Pension funds and LPs point to the slow uptick in interest rates, a correction in asset valuations or some other economic or political event as potential headwinds, possibly in late 2022 or early 2023.

“I think it’s very likely that something like [an economic or political shock] will happen in 2022 and that will impact private market valuations as we have of course seen over the past two years,” says Markus Benzler, global head of multi-manager private equity, UBS-AM Real Estate & Private Markets. “We wouldn’t go so far as to say ‘prepare for it’ but we are very mindful that this can happen.”

“Let’s be prepared not to always go in one direction.”

Washington State Investment Board LP name

“It will be a record year for re-ups,” says Sunaina Sinha Haldea, global head of private capital advisory at Raymond James. “LPs are finding it very difficult to focus on new relationships, and are really hunkering down on existing relationships. That theme is going to continue for most of 2022.”

“Plenty of GPs will get funded fast, but plenty of GPs will be waiting for LPs to figure out what they can and can’t do, despite showing strong performance,” says Bentley.

The key question for GPs in 2022 will be ‘what percentage of allocation do LPs have for new relationships?’ says Vincent Goupil, deputy head at placement agent Jasmin Capital in Paris.

There is no one answer to this question, say those with knowledge of market. One solution has been for GPs to grow or launch more specialised fund strategies to win over smaller pockets of allocation, for example around sustainability, growth equity or in a specific sector.

An example of this last year, says Goupil, was first-time French fund Vivalto Partners which raised EUR 500m to invest in healthcare assets.

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Texas County & District Retirement System New York State Teachers Retirement System Inc California State Teachers' Retirement System Minnesota State Board of Investment Tennessee Consolidated Retirement System 1

2

3

4 5 USD bn

6

7

8

9 Made with

Source: Bloomberg Private Equity Database (based on aggregate reported commitments to private equity funds in 2021)

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N E W IN VE S T OR S

THE NEXT FRONTIER FOR PRIVATE EQUITY: INDIVIDUAL INVESTORS

High-net-worth individuals and retail represent a further stage of growth in private equity allocations. The largest fund managers are leading the charge, as regulators watch closely

T

en years ago, private equity giant Blackstone relied exclusively on large institutional investors for its capital. Last year, around 20% of its USD684bn AUM came from individual investors. It could reach around half in the next decade, according to the firm.

Co-founder Stephen Schwarzman believes retail is an USD80tn addressable market and other large private equity managers including KKR and Apollo are taking notice too.

According to a recent survey by consultancy Oliver Wyman, individuals are expected to allocate an additional USD 1.5tn to private markets by 2025.

“When we look at where the large funds are putting a lot of their focus and where they’re building new

teams, it’s [the retail] investors that jump out,” says Peter Witte at EY. “It’s an untapped market and by and large, those markets have been kind of frozen out of institutional commingled funds for a long time.”

Banks, particularly in Europe and Asia, have been developing alternatives investment platforms to target the growth in private clients there. Fintech feeder vehicles from Moonfare (started by an ex-KKR executive), iCapital Network (partowned by Blackrock) and others are funnelling huge amounts of retail capital into the most well-known private equity funds. And, more recently, private equity funds are being ‘tokenised’ through blockchain to potentially allow investments for as little as a dollar.

In an environment of low interest

rates where more and more companies are shifting into private hands, the owner of Moonfare claimed last year that there is a “political need to open up these markets”.

Regulators may have been listening. Last September, an advisory group for the US Securities and Exchange Commission (SEC) recommended making it easier for the less wealthy to invest in private equity. European authorities have also proposed changes to the European Long-Term Investment Fund (ELTIF) which will remove minimum investment and wealth requirements for individuals while also broadening the type of assets fund managers can hold.

Throughout the last decade, wealthy families have gravitated

Are fund managers seeking to increase capital sourced from wealth management or retail channels?

7%

42%

51%

Yes

No

Don't know

Source: EY, Survey of fund managers, 2021 P R IVAT E E QU IT Y W IR E IN S IG H T R E P ORT

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N E W IN VE S T OR S

Which strategies are you considering to source retail capital and private wealth?

Public listing of alternative funds

Listing funds on ntech platforms that aggregate individual retail investors

Informal networking through existing clients

Listing funds on bank wealth platforms and investment adviser networks, directly 0

10%

20%

Source: EY, Survey of fund managers, 2021

away from hedge funds to private equity and venture capital, in particular.

They are generally considered to be more comfortable with entrepreneurial risk and evaluating management teams and want the higher returns on offer in VC. This has also put them at risk of overconcentration in their area of expertise, say their advisers.

Yet from the perspective of fund managers, they are also a diverse group with a wide set of differing objectives. “All have distinct investment objectives and time horizons. It gets granular very quickly,” writes Jan Philipp Schmitz, Ardian’s Head of Germany and Asia, in an article on the company’s website.

In the past 12 months, there

has been a sharp drop-off in family offices’ use of funds-of-funds, while involvement in funds and direct investments has risen significantly, according to UBS’ Global Family Office Report 2021. More than three quarters (77%) now make expansion or growth equity investments.

Netting flows

In October, BlackRock partnered with Credit Suisse to launch the first in a series of private equity vehicles targeting individuals in the private wealth market. But rather than a traditional tech and heathcare buyout strategy, they chose an impact fund focused on health and wellbeing.

Wealth managers have traditionally cited a lack of appropriate vehicles,

30%

40%

50%

Made with

regulation and higher costs as barriers to high-net-worth individuals investing in private equity. The same is also true for retail investors – seen as a more fractured and less transparent marketplace.

“Over recent years one of the biggest trends we’ve seen in the way private clients approach private markets has been the development and uptake of semi-liquid vehicles and greater specialisation in certain segments,” says Simon Jennings, managing director at HarbourVest.

“Large pools of private client’s wealth historically held back on concerns of long lock-up periods have been driving innovation in this area. Private banks and wealth management firms have been trying to find ways to crack this nut for some time and we are starting to see

“

One of the biggest trends we’ve seen [among] private clients has been the development and uptake of semi-liquid vehicles and greater specialisation in certain segments

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Increased marketing to retail investors directly, including advertising and sponsorship

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N E W IN VE S T OR S

a proliferation of new ideas which create monthly or quarterly liquidity mechanisms for clients to meet this demand.”

These new ideas include the ‘tokenisation’ of a private equity fund by Partners Group in Singapore last year, vehicles with monthly or quarterly subscriptions and redemptions, and listed vehicles, such as investment trusts, where investor decisions to buy or sell holdings doesn’t prompt the trust to sell portfolio investments.

Blackstone has traditionally targeted individual investors in the USD1m to USD5m range due to their under-representation in the alternative investment arena. It is a group that represents around USD30trn or 44% of the global individual investor market, says the firm.

With individuals investing less than USD1m, the market expands further. Yet many smaller GPs are still reluctant engage with such investors because of the administrative burden involved.

Larger private equity funds,

especially those with bulging sales teams and technology platforms or partners, have an obvious advantage. “[Retail flows] are inevitably targeting the brand name managers because a known name is reassuring,” says Andrew Bentley, partner at Campbell Luytens. “If you want an index, you go for a brand name. So the middle market, lower middle market, sector funds and emerging managers all have to work harder, and be better, to compete against this flood of money that’s predominantly going to listed houses.”

Hard work

Scale is an advantage, says Witte at EY, but he is also seeing GPs continuing to focus on the institutional market. “I think the direction of travel is just for the larger firms to sort of lead the way on this stuff,” he says.

A growing set of managers are turning to fintech allocation platforms not just for the new customers but also to aggregate

demand and address anti-money laundering and know-your-client responsibilites, according to EY’s 2021 Global Alternative Fund Survey.

Of course, while the end game may include billions of dollars of new capital flows into private equity funds, subsequent changes in regulation may be a double-edged sword, say fund managers.

Closer scrutiny of private equity funds (large and small) by regulators is expected to follow an increase in retail interest and greater standardisation of fee structures and returns will ultimately be demanded too.

Many of the wealthy individuals turning to the private equity market over the past two years may not care.

“It’s quite a bull market phenomenon,” says Bentley. “In prior ‘up cycles’, retail investors have been quite a fickle part of the allocator market, individuals tend to be quite highly levered and just turn the tap off in more difficult times, unlike the institutions.”

WEALTH WHISPERERS Large-cap private equity firms have been buying up wealth management and advisory firms to get closer to the trillions of dollars of untapped allocations held by high-networth investors.

Last year the number of private equity deals for registered investment advisers increased by more than two-thirds from 2020.

They included Apollo’s agreement to purchase US wealth distribution and asset management arm of Los Angeles-based Griffin Capital, TA Associates’ investment in

the advisory group Caprock and KKR buying half of USD 20bn Beacon Pointe Advisors.

In June, BlackRock expanded its partnership with fintech platform iCapital Network with plans to launch a series of private markets funds targeting wealth managers. A private credit strategy using iCapital’s AIFMD-compliant feeder fund structure will be followed by a series of funds focused on private equity and real assets, potentially based in impact investing, said Blackrock in reports at the time.

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R E G U LAT ION

UK TO UNLOCK DEFINED CONTRIBUTION PENSIONS As defined benefit (DB) pensions phase out, concerns over liquidity and fees among DC pensions are being investigated by advisers and governments in the UK

D

efined contribution (DC) pensions are set to become dominant investors in private market funds within the next two decades.

UK investment consultants are leading the way in researching ways to access this largely untapped market, promising benefits for private equity fund managers globally.

According to The Pensions Regulator, workplace DC assets in the UK were just over GBP500bn in 2021 and are expected to grow in value to GBP1 trillion by 2030.

Some DC-based pension funds such as Nest (which recently committed GBP1.5bn to private equity) are targeting private equity in anticipation of greater opportunities and innovation.

Fund managers including Schroders, Blackrock, and Partners Group have been linked to the investor segment in recent reports.

“Every investment consultancy specialising in DC will be researching this given its potential to improve retirement outcomes for members of DC schemes,” says Hugo Gravell, investment actuary, Barnett Waddingham.

Moving hurdles

DC schemes differ from other pension schemes as, unlike defined benefit schemes, they depend on how much an individual investor contributes to the pension, as well as on how well the investments perform.

Due to the risks that are involved with DC schemes, pension holders have greater valuation and liquidity demands – characteristics traditional private equity funds are not usually known for. Conditions have been created by government intervention to support the requirement for more long-term investment in DC pension

funds, but high fees and illiquidity issues still represent hurdles.

“Defined benefit is going to get supplanted by defined contribution plans,” says Andrew Brown, head of private equity research at Willis Towers Watson. “However, DC plans have charge caps and require daily liquidity and valuations, which doesn’t work well with the current private equity closed-fund model.”

In June 2021, the UK government published ‘The future of the defined contribution pension market: the case for greater consolidation’. It noted the “exponential growth” of defined contribution plans since 2012, when automatic enrollment was first introduced. As of 2021, there were 1,560 workplace DC schemes in the UK, with more than 12 members – a reduction from 4,560 in 2010, offering schemes greater scale to achieve better

How Europe’s DC pensions allocate to alternatives Netherlands UK Spain France Denmark 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Private equity

Growth fixed income

Real assets

Hedge funds and DGFs (Diversified Growth Funds)

Other

Source: Mercer, 2021

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Private equity should not just be for the DB pension era but to make it commonplace within DC schemes, more work and, in some cases, a reset of expectations is needed

investment outcomes through consolidation.

As the pension industry shifts away from defined benefit (DB) plans in the UK, an opportunity has presented itself to investment managers to improve access to DC assets.

“Private equity should not just be for the DB pension era but to make it commonplace within DC schemes, more work and, in some cases, a reset of expectations is needed,” says Richard Dowell, partner and co-head of clients, Cardano.

The UK government has also put a 0.75 per cent charge cap in place to protect pension holders in DC schemes from high fees when investing in private equity. In November, the Financial Conduct Authority (FCA) helped launch the Long-Term Asset Fund (LTAF) to remove barriers and boost investments in private equity.

Yet some large pension schemes have been openly critical of these initiatives, arguing that it is not the government’s place to play a role in asset allocation.

Others are growing their allocations anyway. Nest wants to allocate 5 per cent of its AUM (cGBP1.5bn) to private equity by 2024 and is reported to be selecting fund managers. Stephen O’Neill, head of private markets, Nest, said in August last

year that the fund expects to invest GBP80bn over the next 20 years, with the aim of “private equity playing an important role in our portfolio, offering strong returns and diversification”. When asked for additional information, Nest told Private Equity Wire that it was in the middle of active procurement and so unable to comment.

DC dominance

According to Mercer’s European Asset Allocation Insights 2021, alternative allocations in UK DC plans remain heavily dominated by hedge funds. Out of 6 countries, including the UK, the Netherlands has the largest allocation to private equity (this was skewed by a large allocation by a single investor), followed by Denmark and France (see previous page).

DC will be the dominant asset owner in private equity within the next 10-20 years, according to global investment advisor Willis Towers Watson. It is one reason the firm is so keen to come up with a solution to the issues around valuation transparency, fees and managing liquidity in an illiquid asset class.

“We have a task-force who talk to large asset managers, both on the public and private side, and who are

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looking to create a solution or product that will allow asset managers to access this new and fast-growing market,” says Brown.

Possible solutions include mitigating drawdowns, such as through ‘blended funds’ where a pension has investments across different managers and across different asset classes, including private equity, offering access and control over some of the liquidity. Partners Group was reported to be the first private markets firm to launch these types of ‘semi-liquid’ funds in the UK. As DB schemes are phased out, it is important for the same investment opportunities to be available to those who only have investments in DC schemes, say advisers in the space.

Last October, the Pensions and Lifetime Savings Association (PLSA) (UK pensions) launched a Made Simple Guide on long term asset funds (LTAFs) which aims to explain the benefits of diversifying your portfolio by investing in private markets.

The guide encourages a focus on long-term net returns, rather than initial fees.

Advisers spoken to for this article, including at Barnett Waddingham and Redington, point to the industry wide efforts to help DC schemes

The UK’s largest DC pension providers Total DC Assets - GBP Legal & General

114bn

Aviva

81.3bn

Scottish Widows

68.2bn

Aegon

57.9bn

Standard Life

43.1bn

Source: Master Trust and GPP Defaults Report, April 2021, Corporate Adviser

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R E G U LAT ION

In the US, the average target allocation of pension plans to private capital was 30.7 per cent last year, according to Public Plans Data, increasing from 28.7 per cent in 2015. The incremental percentage change represents an added USD143 billion in investment.

Pension funds in other developed economies are moving in a similar direction. In Switzerland, since January 1 this year, unlisted assets are considered a standalone investment category for the country’s pensions with an allocation ceiling of 5 per cent of total assets (instead of falling with the alternatives investment cap of 15 per cent).

According to Mercer’s 2021 Asset Allocation report, the average allocation for European defined benefit pension plans was 53 per cent to fixed income, 21 per cent to equities, 23 per cent to property and alternatives, and 3 per cent to cash. The ongoing move of these schemes to de-risk out of equities has kept allocation trends fairly steady, but alternatives have benefited, it says. In a survey by the company, most European investors reported plans to increase exposure to alternative assets while decreasing exposure to equities.

A similar survey in Japan found that approximately 60 per cent of corporate defined benefit pensions have already invested in private assets, and

approximately 50 per cent intend to increase private markets allocations over the next five years.

Asia has long been identified by many of the large-cap private equity funds as a fertile hunting ground for under-allocated pensions (see page 19) but despite being a home to ‘whales’ such as Japan’s GPIF and South Korea’s National Pension Service, private equity fund commitments have been slower to ramp up.

NPS has been steadily diversifying its USD778 billion AUM beyond fixedincome investments, with alternative investments, including private equity funds, increasing 28 per cent between 2007 and 2017, according to McKinsey, however it has often fallen short of its target allocation.

Japan’s GPIF – the world’s largest pension fund – has also tended to be under-allocated to private equity but last year showed signs of a more aggressive push. In a paper posted on its website, it said a portfolio of exchange-traded assets capable of tracking the longterm performance of private equity benchmark indexes would open the door for institutional investors to “rapidly scale up exposure without worrying about illiquidity.” In the summer of 2021 it earmarked more than USD6 billion for private equity.

“

DC is a huge multi-trillion-dollar market that private equity hasn’t addressed at all

invest in private markets. Barnett Waddingham sits on the Productive Finance Working Group which is cochaired by the Bank of England, HM Treasury, and the FCA. Redington also claims the UK government aims to have private equity investments available within the next six months.

“The DC industry has been discussing allocating to private markets for several years, but there’s certainly been a more concerted push from the government, regulators, and the pension schemes themselves all pushing in the same direction. I would expect to start seeing some fund launches under the LTAF banner again by the middle of this year,” says Jonathan Parker, head of DC, Redington.

The UK Treasury did not provide a update to Private Equity Wire on the plan despite multiple requests.

“

NUDGING GLOBAL PENSIONS

Other private equity markets globally will be taking note but may be slower to reform.

Investment advisors in the US agree that DC is “extremely topical” as an allocation trend, but many don’t feel that it’s within their grasp for private equity just yet.

“It’s an extremely challenging process, and many of the regulatory hurdles that are passed are then met with other hurdles,” says Chris Shelby, director, private markets, US-based Verus Investments. “Progress has been made, but slowly,” he concludes.

US-based adviser Colin Murfit, director of research at Alan Biller and Associates, adds: “DC is a huge multi-trillion-dollar market that private equity hasn’t addressed at all.

So the question is, will private equity ever be able to find a way to get into DC portfolios?”

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IN T E RVIE W

ASKING THE ALLOCATORS IAN SANDIFORD, SENIOR PORTFOLIO MANAGER – A LT E R N AT I V E S , B O R D E R T O C O A S T

B

order to Coast Pensions Partnership, one of the largest pension pools in the UK, was established in 2018. It manages the investment of pensions assets of 11 Local Government Pension Scheme funds holding circa GBP55bn of assets How has your private equity investment strategy changed over the past year?

The market as a whole is increasing exposure to alternatives and private equity however those with an established legacy portfolio have probably seen quite a strong run of private equity performance over the last 12-18 months so it’s possible that this might temper some investors’ allocations in the near term.

While we have clear areas of investment focus, we’re tasked with delivering a broadly diversified portfolio and have therefore tempered our exposure to these key themes. We therefore haven’t experienced, and don’t anticipate, meaningful changes to our PE investment strategy, with continued appetite for tech and software, healthcare and pharma and Asia.

We aim to diversify our programme with some degree of real economy exposure and also have some exposure to special situations, in case of market downturn.

How often do you allocate to emerging or first-time managers?

As we’re a new programme, our current fund managers are all new relationships to some degree.

Nonetheless, we have reviewed some new managers across private markets, and committed to second generation funds in our private equity and infrastructure programmes. Our overall programme does have a bias towards established managers – we don’t have a discrete pocket for new managers.

What advice would you give to new fund managers in the current market?

As well as not having a track record of returns, one of the challenges for newer funds is whether they have the institutional quality in terms of operational due diligence, so we’re very focused on making sure they have appropriate compliance procedures to manage things like valuations.

Another issue is that we are looking for fee discounts and, typically, a small manager with a single fund or on a second generation isn’t necessarily best placed to offer fee discounts, particularly if they’re trying to build out a team.

Do you have any concerns about the current pace of fundraising?

There are clearly concerns around access to high quality funds. With more people allocating to private markets, there’s more competition for access.

Also, [we have concerns regarding] the size of funds that are being raised at the moment and what that means in terms of manager discipline, how that changes the alignment between managers or what they receive from management fees versus their dependence on carry.

We’ve also seen some really fast deployment. While we don’t necessarily have concerns over the individual assets acquired by these managers, there are concerns around what this means for portfolio diversification, vintage diversification, and our ability to re-up with managers on a regular basis.

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IN T E RVIE W

ST E F F E N PAU LS , C E O, M O O N FA R E

What are private wealth and retail investors currently seeking from private equity?

Ultimately investors seek high returns. Current low interest rates, concern about high inflation rates and high volatility in public markets have led to investors increasingly turning to private equity to diversify their portfolio. It’s a unique source of value creation that cannot be found in public markets.

How do you see fintech feeder platforms changing fundraising long-term?

The private equity industry is going retail. Fund managers are looking to retail investors for capital and to diversify their revenue and client base. As private fund managers gain increasing access to the largest untapped pool of capital out there, they become less dependent on very large institutional investors.

For non-institutional investors, digital platforms provide the

opportunity to have a direct relationship with fund managers but also a more transparent one than they would have as a private banking client. We provide reporting, education and regular updates to investors. Additionally, as part of Moonfare’s mission to create a community of like-minded individuals, we connect investors with fund managers through, for example, live webinars such as ‘Meet the Manager’ and ‘DealTalk’ or events hosted by our offices. And most importantly through our digital secondary platform we offer a path to liquidity, making a previously illiquid asset class liquid.

How do lesser known and emerging fund managers access retail customers?

When sourcing funds, our investment team performs in-depth due diligence to gather holistic insight into an investing opportunity. The investing framework evaluates funds based on five different aspects ranging from the funds track record (delivering top-tier results consistently across fund vintages) to assessing and understanding the fund manager’s level of experience in managing similar strategies and evaluating its governance structures.

The team screens more than 200 funds in a given year, but less than

25 funds make it to the investment platform. Curation from a highly experienced investment team is what differentiates us from others.

This in-depth process does favour established top-tier funds with a strong, long-term and consistent track record. However, we also feature high quality middle market and smaller funds that meet the selection criteria, such as H.I.G. and Lerer Hippeau in the past.

How are you planning to grow your platform within private equity?

In the past years, we have consistently more than doubled AUM every year and we expect to keep that pace, if not accelerate.

Very soon we will offer credit as a new asset class on our platform. In addition we will significantly build out our co-investment offering over the course of the year.

Furthermore, we are consistently growing our international footprint.

We are already operating in over 18 countries globally and there are more markets to follow very soon.

Our fund pipeline includes funds in the growth equity, private credit, secondary, infrastructure and technology segments. And there’s more to come - we see sustainable investments as an exciting growth area.

“

The private equity industry is going retail. Fund managers are looking to retail investors for capital and to diversify

“

M

oonfare is an online trading platform which funnels private wealth and retail investors into private equity funds. It was built by a team of professionals from companies including Google, JP Morgan and Blackrock and surpassed EUR1bn AUM in September.

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S T R AT E G IE S

LPS KEEP ONE EYE ON TECH, A S I M PACT F U N D S S WE L L Rising public market valuations and tech-based disruption has pushed investors towards sector specialist managers. Demand is now building for more general macro strategies too

T

echnology was the dominant theme for private equity investors in 2021 – not just in terms of ‘how’ they allocated their capital, but also ‘where’.

Software companies and fund strategies based on digitalisation were more sought-after than ever, and the trend is still sweeping across other sectors including healthcare and financial services, most notably in payments and insurance solutions.

According to figures from EY, 30% of total capital deployed in 2021 was allocated to technology companies, followed by firms in the consumer space, with 24% of aggregate deals by value.

Recent high-profile transactions include Bain Capital and Hellman & Friedman’s USD17bn agreement to buy ‘healthtech’ company Athenahealth, Advent and Permira’s USD12bn move on McAfee Corp and Clearlake Capital’s USD5.4bn agreement to buy Quest Software.

“Everyone is absolutely blinkered by anything tech at the moment,”

says one US-based GP. A boom in venture capital (VC) has skewed the market further, drawing more investors into early-stage tech companies and disruption strategies.

“VC went into hyperdrive in the pandemic,” says Brad Young, global co-CIO, private markets, at Mercer.

“It’s being driven by things like healthcare and working from home, so I think the growth will continue for the foreseeable future.”

New venture fund allocations to healthcare increased by 30% on 2020’s record with investment into companies exceeding USD86bn in the US and EU, according to Silicon Valley Bank’s annual healthcare investments and exits report.

Healthtech experienced the greatest increase in investment of 162%, driven in part by the medical devices market, which saw a four-times increase in European investment specifically.

Demand from LPs for tech-based strategies will continue during 2022, say fund managers, but it will be

tested by even larger tech buyout funds, such as Vista Equity Partners, Thoma Bravo, Silver Lake and Francisco Partners, coming back to the fundraising market.

Valuations in the technology sector are also raising some eyebrows among LPs: EBITDA multiples now regularly hit or exceed 20x after a decade of rising investment.

Technology-linked assets have generally attracted increasingly higher valuations over the past decade, taking cues from rises in the public markets and the promises of cloudbased software and blockchain.

But in January this year, tech stocks dramatically shed USD2.5trn in value since their November 2021 record high, as fears of rising interest rates hit the market.

Tech play

“I think you have LPs that are worried about the amount of exposure that they have in the tech space and then you have LPs are saying ‘This is the

The most attractive sector for private market institutional investors in 2022 Information technology Healthcare Infrastructure Energy Real estate Financial Industrials Consumer (discretionary) Communication services Materials Utilities Consumer (staples) 0

5% 10%

15%

20%

25%

30%

35%

40%

45%

Source: Natixis Institutional Investor Survey 2022

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You have LPs worried about the amount of exposure they have in the tech space... but the prevailing view is that we are still in the early stages of the tech boom

thing that’s gonna play out over the next 30, 40, 50 years,” says Peter Witte at EY. The prevailing view is that we are still in the early stages of the tech boom, he adds. “It still has a lot of runway to go.”

After extending into healthcare, specialised tech-based strategies will continue to steer the boom in VC while also more strongly influencing investment in sectors such as food and agriculture and the energy transition, says Gabrielle Joseph, head of due diligence and client development at placement agent Rede Partners.

Opportunities around technology-based farming, food processing and supply chains and logistics are all being pitched to investors by specialist funds.

“Investors’ approach to [technology] assets has become more sophisticated,” says Jérôme Chevalier, founding partner of Six in 10 institutional investors now tech dedicate more than 5 per cent of their private and

#TRENDING: SECONDARIES

equity allocation to secondaries funds, according to Montana Capital Partners.

Almost 40% of family offices and foundations allocate over 15 per cent. After a busy period of GP-led secondary deals, a resurgence in LP stake sales is expected. Stepstone is raising the largest-ever VC secondaries fund and Ardian was the buyer of the largest ever infrastructure secondaries last year.

healthcare-based Quadrille Capital. “GPs are pivoting away from pursuing disrupters in favour of companies with clear and financed pathways to further growth.”

According to Commonfund Capital’s fourth annual private markets investor sentiment survey last year, 40 per cent of investors said they will direct more money toward sector-specialist buyout funds, and 33 per cent for generalist funds. Investors also favoured venture capital for returns and allocations, with 38 per cent planning to boost allocations and more than half expecting above average or high return potential.

First-time and emerging managers have traditionally attempted to differentiate themselves from larger brand names GPs with a more specialised or sector-based strategy. Research shows that investments by sector-specialist private equity funds tend to outperform those by generalists by a small margin, but an overspecialisation can also alienate new LPs and limit investment opportunities.

One fund strategy which has instead opened doors in 2021 has been impact investment, with larger managers including TPG, KKR and Bain using USD 1bn-plus platforms extensions and spin-offs to garner mainstream attention.

“The great thing about impact investment is that it is such an equal opportunity investment approach,” wrote Tania Carnegie, Global Lead, Private Equity & Asset Management, KPMG IMPACT last year. “It can be scaled and

“

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S T R AT E G Y

adapted to all different types of investors, across asset classes, sizes and geographies. What we are seeing now is a far greater breadth of investors getting involved, recognizing that potential.”

Impact gap

TRENDING: SPECIAL SITS As investors look to the next phase of the economic cycle following a decade-long bull market, LP interest is growing in special situations and distressed fund strategies, say placement agents and LPs. The trend benefits experienced teams willing to take advantage of what is known as the ‘complexity premium’.

But there is still an education process required for some LPs. “Many investors associate special situations with a sole focus on deepvalue distress, and an opportunistic approach” says Simon Finn, managing partner at Intriva Capital, “that’s only one component of our overall strategy. Investing on a thematic basis has worked out extremely well during the pandemic[but] providing flexible and tailored financing solutions across the capital structure has allowed us to operate with increased agility to manage complex situations and unlock potential.”

There is still much more room for fundraising in this space.

In a survey of global LPs by HarbourVest Partners, three in four respondents (72 percent) said they plan to increase their allocation targets to sustainability and impact investing within the next two years.

The survey found that LPs remain undercommitted versus their targets for sustainable and impact investing strategies, with a ninepoint gap between their target allocation (21 percent) and their actual allocation to these strategies (12 percent).

Impact investment strategies particularly appeal to institutional investors because of their high ESG score but also because they tend to have global and wider cross-sector exposure.

During 2022, the performance of techfocused fund strategies – whether IT or sector-based – will be balanced increasingly with the opportunities in impact investors and the potential for ESG value creation in other sectors.

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S T R AT E G Y

How LP commitments split across strategies in 2021 North America-based funds

2% 3% 5% 19%

Europe-based funds

1% 8% 4%

33%

1%

Asia-based funds

2% 22%

20%

8%

0% 12% 0% 20%

6%

Buyout

Private debt

Real assets

Venture

Fund of Funds

Growth

Secondary

Buyout Growth Secondary

Other

24%

27%

22%

Real estate

1%

3%

8%

9%

1%

Real estate Private debt

39%

Real assets

Buyout

Venture

Fund of Funds

Other

Growth Secondary

Real estate Private debt

Real assets Venture

Fund of Funds

Other

Source: Bloomberg Private Equity Database

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BORDER CONTROL: THE GEOGRAPHY OF ALLOCATION Made with

A more obvious shift in LP sentiment may be geographic, rather than around strategy or sector.

Based on the quicker economic rebounds in North America and Northern Europe, both continue to be preferred regions of choice for LPs. In terms of deal-making, Nordics, Southern Europe, and the UK & Ireland all hit new highs on both a deal value and volume basis in 2021, according to Pitchbook data.

However, confidence around emerging markets, Asia and the Middle East has waned since the onset of the pandemic, say place-

ment agents and advisers to LPs. Around half of LPs surveyed by Intralinks last year said they will be favouring North America when making fresh capital commitments to GPs. More than half also plan to increase their number of GP relationships meaning fund managers there are likely to attract increased flows in 2022.

Investments in China – traditionally a hub of VC activity – are now on pause for many GPs, following regulatory changes in the country during 2021. Despite growing allocations to Asia, this may limit investor exposure to the

region and potentially push investment away from China (which tends to be more VCbased) into other more developed parts of the region, such as Japan and Australia (which tend to be more buyout-based).

LPs that have enjoyed outperformance over the past year will also be looking more closely at their global allocation and may be tempted to rebalance their portfolios in favour of certain geographies and away from potential over-exposure in tech or healthcare.

Established GPs with impact funds, secondaries and special situations could all

benefit here.

“In our experience, investors tend to favour global allocation,” says Markus Benzler, global head of multi-manager private equity, UBS Real Estate & Private Markets. “Major GPs may have a preference for narrower sectors or products, and investors may be less inclined to certain sectors or geographies, such as venture or the Asia Pacific, however this does not always translate to investment focus in our experience, with investors generally opting for a global [strategy].”

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A S IA

GONE FISHING FOR ASIA’S ‘WHALE’ INVESTORS Large institutional investors in Japan and South Korea are increasing their overseas private equity exposure but the process has been slow. A booming private wealth market could be quicker

A

t some point this year, Singapore is expected to overtake Switzerland as the global centre of private wealth. Hong Kong is not far behind.

Globally, Asia is set to see the largest rise in the number of ultra-high net worth individuals with growth of 39%, led by Indonesia and India, according to Knight Frank’s latest Wealth Report.

In China, too, recently minted tech billionaires and real estate tycoons have been setting up family offices outside the country to safeguard their wealth.

For more than 20 years, private banks from Europe and the US have been using feeder vehicles to steer

growing chunks of Asian wealth into private equity funds. HSBC’s private bank arm raised a record USD 3.2bn for alternative investments from its clients globally last year, a jump of nearly 40% from the previous year. Almost USD 2bn of this was from clients in Asia.

More recently, fund managers have been expanding their relationships with pension funds and institutional investors in the region to concentrate on private wealth too and in October Apollo hired Edward Moon from HSBC as head of Asia Pacific for global wealth in Hong Kong.

The key to unlocking these rising

private wealth allocations, according to Simon Jennings at HarbourVest, is a more liquid investment mechanism that caters to major changes in the clients’ personal circumstances.

To tap into Asian’s pension funds – sitting on billions more in AUM due to shifting demographics and rising salaries in the region – there is another challenge: relationship management.

Lip service

It is generally estimated that around 25%-30% of a global private equity manager’s AUM should come from Asia, far behind North America and Europe.

Asia’s largest pension fund allocators Current asset size (USD m)

Country

Plan name

Plan type

Japan

Government Pension Investment Fund

Government de ned bene t 1,395,289 (DB)

South Korea

National Pension Fund (NPS)

Government DB

685,437

Japan

Corporate DB

Government DB

591,704

Malaysia KWSP (EPF)

Mandatory de ned contribution (DC)

199,751

Japan

Corporate DC

Corporate DC

130,504

South Korea

Corporate pensions

DB

121,801

Hong Kong

MPF schemes

Mandatory DC

111,254

Taiwan

Statutory corporate DC plans (LPA)

Mandatory DC

79,267

SSF bene t fund (old age and child Thailand allowance)

Government DB

69,443

India

National Pension System

Government DC

58,766

South Korea

Corporate pensions

DC

51,015

Government DC

13,985

Thailand Government pension fund Source: Mercer, 2021

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A S IA

Capital Partners’ InfraVia European Fund V, after investments in IFM Global Infrastructure Fund and with Canadian pension fund CDPQ. But Korean pension funds are still far ahead of their Asian peers with USD 101bn invested in private markets in 2020, accounting for 11% in their portfolios on average, up 0.9%, according to Mercer’s Asset Allocation Report 2021.

In Korea and Japan, understanding each country’s regulatory landscape is key, say managers and advisers working in the region.

Open gate

In Japan, professional ‘gatekeepers’ must be appointed before allocations can be made into private equity funds.

In Korea, the passing of a reform bill for the Capital Market Act, coming into effect last year, will allow Korean private equity managers to provide an extended pool of investment structures and terms to investors. The reform will have a positive impact on Korean institutional investors’ overseas investments, which has traditionally targeted on real estate and infrastructure, said Preqin last year.

“When you look at the Japanese or the Korean market, they’re very active domestically,” says Maltezos.

“In Korea, there’s a symbiotic mentality that goes on. No small Korean pension fund is going to stick their neck out and invest in private equity in complete isolation. In some aspects, the regulators encourage them to invest in packs [and] the larger peers provide helpful leadership and support in the asset class when they are seen investing in it.”

The largest of these peers is Korea’s National Pension Service (NPS), the third largest public pension in the world with around USD 800bn in AUM. Private equity holdings represent

around 37.5 percent of its total alternatives portfolio and recent private equity fund manager appointments include Beijing-based Hillhouse Capital and Macquarie Asset Management Korea.

Its PE AUM has nearly doubled over the past five years and it wants to raise allocations to alternatives from around 11% to 15% by 2025.

To do this, just over a year ago it formed a partnership worth a reported USD1.2trn with the largest pension fund in the Netherlands to invest in large-scale infrastructure assets.

Later, in 2021, it announced tie ups with BC Partners and Stafford Capital Partners.

More strategic partnerships are planned with the fund targeting investments in hydrogen and electric vehicle battery.

Sovereign wealth fund Korea Investment Corporation (KIC) – which surpassed USD200bn AUM last year and invests entirely outside the country – shares a similar outlook. It wants to increase its alternative allocation from around 15% to 25% by 2027 and last year opened a San Francisco office to cement a commitment to US tech startups.

In January KIC’s Chief Executive Jin Seoungho said it will increase private equity and venture investment in the tech sector such as artificial intelligence, software and information securities, as well as healthcare and telecommunications infrastructure.

But during 2021 more than 10 employees left its alternative investment division, adding to a steady flow of exits since 2017 which include former private equity team head Jay Huh. Making efforts to understand the challenges and goals facing these Asian giants may only be for the brave in 2022.

“

Asia is very, very difficult this year because beyond any other market, it’s heavily relationship driven

“

“Every GP is keen to raise more money from Asia... but I don’t think you’re going to get much more than 35% of AUM [from Asia] without a serious commitment,” says George Maltezos, a partner at Campbell Lutyens, based in Hong Kong.

It is no easy move. Most US or Europe-based GPs don’t want to come to Asia twice a year, open an office or employee a local team that speaks the language, say placement agents.

“Building partnerships in Asia is no easier than elsewhere. It takes time and commitment. Often [GPs] want the billion dollars first, and then they want to make the commitment – rather than the other way around,” he says.

For many of those that have made the commitment, the fundraising process has been long and slow – made even more so by COVID-19 and international travel bans.

“Asia is very, very difficult this year because beyond any other market, it’s heavily relationship driven,” says Sunaina Sinha Haldea, global head of private capital advisory at Raymond James. “They have to meet you, see you, touch you, feel you for long periods of time. The common anecdote in the market is it can take three years to get a cheque out of a Japanese investor, because that’s how long it takes them to get comfortable with you.”

Asian pension funds’ allocations to alternative assets showed only a modest increase of 0.6% from 2019 to 2020, and there is massive disparity between large pension funds in Japan and South Korea – knowns as the ‘whales’ – and others in the region.

Japan’s GPIF is more aggressively pivoting away from equities to alternatives, and pockets of institutional capital in Thailand and Taiwan are turning to private equity too. One example is Taiwan Life Insurance which last year allocated EUR 25m to InfraVia

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T E C H N OLOG Y

TECHNOLOGY IS A WEAPON IN THE FUNDRAISING WAR 2022 will be the year the level of in-person and online meetings rebalance to create a new fundraising ‘normal’ for years to come According to the SS&C Intralinks 2022 LP Survey, last year only 1 in 5 LPs said that they would be happy to consider investing in a fund manager they’ve only ever met virtually, highlighting the confidence LPs have in virtual conferencing and due diligence.

Virtual virtues

However, though virtual fundraising has been challenging, networking and pre-marketing was successful across some regions, particularly Northern Europe and parts of the US. “I think you could do a lot of relationship building in the first lockdown,” says a European GP. Larger fund managers with a more developed technology offering platform have been better positioned than others to take advantage here.

The Brackendale Private Equity Corporate Identity LP Sentiment Survey H2 2021 found that 69 per cent of LPs said they would be somewhat discouraged from making an investment in a private equity fund

if it had a sub-standard website. Of this 69 per cent, nearly a fifth went as far as to say they would be entirely discouraged.

When LPs were asked by Intralinks how satisfied they were with the technology capabilities of their GPs, only 20 per cent were ‘very satisfied’, showing the gap most fund managers still need to cross.

According to Jessie Juan, partner and co-founder at technology company Quantium, “Today’s LPs are far less tolerant of time lags when they request data, driven by the current climate where international instabilities and sudden regulatory changes can significantly impact decision-making.”

“GPs are getting greater access to potential LPs because of increasing access and comfort with video conferencing,” says Steven Okun, CEO, APAC Advisors. “Those GPs that are best adapting to the virtual world have a great advantage in the competition for capital. Any GP that has not had professional training on how best to communicate

“

GPs are getting greater access to potential LPs because of increasing access and comfort with video conferencing

“

T

he private market fundraising process underwent a historic transformation through the various stages of Covid-19, but many of the adjustments made during 2020 and 2021 are now being reviewed by GPs and LPs as travel restrictions and lockdowns ease in the UK, Europe and the US. In 2020 fund managers relied mainly on existing relationships to raise and close funds virtually. Last year saw a shift back to engaging with new clients.

“In 2021, the situation largely didn’t change, but we had to meet new managers and find new ideas,” says Kevin O’Donnell, global head of investment relations, Adams Street Partners. “And by doing so online, we raised double what we had in 2020, and it was a record year for the firm.”

Over the past two years, LPs have been under pressure to allocate to existing GPs that have performed very well. There has been skepticism around investing in new managers virtually.

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T E C H N OLOG Y

Would you consider investing in a fund manager you’ve never met, in a fully virtual environment, over the next 12 months?

35% 30% 25% 20% 15% 10% 5% 0 Happy to do so

Yes, on a limited basis

Potentially

Probably not

Would never consider it

Source: SS&C Intralinks 2022 LP Survey

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and present virtually will be disadvantaged.”

The jump from phone calls to Zoom meetings has been fairly simple for most firms, but tech literacy is an evolving process, say LP consultants.

“Industry appetite for technology investment is strong, with encouraging spend trends indicating high intent to implement digital solutions,” says Juan.

Air miles

As well as the reduction in carbon emissions from higher air miles, a GP’s online marketing and communications can provide LPs

confidence in the level of reliability and professionalism that a fund could offer to their clients, and a certainty that GPs are focused on their investors.

According to the Brackendale survey, 88 per cent of LPs said that, even if a private equity fund was producing strong returns, it would matter to them if it had badly designed or poorly written investor marketing materials.

It’s clear that progress still needs to be made on this front, but it’s also evident that virtual fundraising can only work efficiently up to a certain point.

Given the private equity market’s

history of big personalities and corporate hospitality, hosting Q&As and larger conference-style events over the internet is difficult, say O’Donnell and Jonathan Parker, managing director, Redington. It can restrict the openness of the conversation, cap charisma and prevent personalities from coming across well.

In the fundraising war, charisma and technology will increasingly be seen as equally powerful weapons.

“GPs are going to have to invest in the technology and skills that will be able to meet the demands for hybrid fundraising, as well as for having hybrid LP meetings,” says Okun.

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P R I VAT E E Q U I T Y W I R E

CONTRIBUTORS: Colin Leopold Head of Research & Insight colin.leopold@globalfundmedia.com Fiona McNally Reporter fiona.mcnally@globalfundmedia.com Scott Newman Art Director scott.newman@globalfundmedia.com FOR SPONSORSHIP & COMMERCIAL ENQUIRIES: Jo Cole Commercial Director jo.cole@globalfundmedia.com

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