The private equity market has outpaced other asset classes in recent years and it is expected to continue its stellar performance. How has Covid-19 affected the outlook for private equity buyouts and what do you expect the main growth drivers will be over the next five years?
Dirk Holz. – “The alternative asset industry underwent enormous growth in the years preceding the Covid-19 pandemic, with assets under management in the region of $10 trillion. The virus has had a big impact on the private equity market since Q2 of this year and we experienced a general slowdown on the transaction side during the lockdown. This has continued into the summer, but in recent months we have witnessed a pick-up in activity. A handful of fund managers are preparing capital call rounds, meaning they are starting to target investments. We are also beginning to see some general partners preparing vintage funds for the end of this year and new fund launches in 2021.
On the investment side, there has been considerably fewer transactions in the last few months, although there has still been a relatively stable investment flow. But an interesting pipeline is beginning to develop with clear investment opportunities at attractive prices, including in traditional business segments like manufacturing and growing sectors like biotechnology. If these deals come to fruition then we could end 2020 on a high note.
How will this market evolution impact Luxembourg and what does the country have to offer investors?
“Luxembourg has emerged as an important global player in the private asset space. Approximately 60% of global general partners are now doing some form of business through Luxembourg. This is largely because the Grand Duchy developed a regulatory framework fairly quickly when the Alternative Investment Fund Managers Directive (AIFMD) regulations came into force. Luxembourg also offers clients in the private equity space a vast toolbox of legal entities, making it straightforward to establish investment vehicles in a relatively short period of time and efficient for global intuitional investors.
Recruitment also remains a challenge in the financial sector, particularly in funds. Can you explain what skills are in high demand and how you plan to attract new talents?
“Private equity is expected to continue growing rapidly and this will have an impact on staffing. Our products and services are still highly customised and, therefore, additional resources are required to deliver new business. In particular, we are experiencing a shortage in experienced staff with expertise in fund administration, capital management and the depository side of the business.
There is real competition for talent between service providers. Being a global bank, one of the big advantages at Société Générale is that we operate across multiple jurisdictions and can offer global mobility. There is also mobility across business lines, not only in fund services but in financing and other areas within the Group, which can open up interesting development opportunities.
How can consultants and service providers support the growth of the private equity industry?
“Service providers specialising in regulation, administrations services, depositary, custody, accounting and capital management are all in high demand. Most players in the private equity market offer these services. What differentiates us is that we can offer financing, including bridge loans and investment financing. Many clients we speak to are also demanding bank accounts to hold cash. It is getting increasingly difficult for providers to offer these services, but here at Société Générale we can offer clients a complete package.
Why are data and digitalisation important in the private equity market?
“Technology is driving rapid change in the financial sector and private equity is not immune. We have a competitive advantage when it comes to digital services. As a large group we can test and adopt various disruptive technologies. The digitalisation of data is an area we need to explore further as it can help us improve the way we benchmark funds and generate more market transparency. Change is certainly on the horizon.
Private banks and family offices are increasingly taking an interest in private equity. What is causing this trend and can retail investors also get exposure to private assets?
“Most of the funds in private equity are funded by institutional investors. According to a report about private equity trends from Preqin, investors committed $595 billion to private equity in 2019, the third year in a row the amount secured by private equity funds has surpassed $500 billion. The same report also showed that 41% of investors expected to commit more capital to private equity investments in the next 12 months starting November 2019, a 10-percentage point increase compared to the previous year. This sustained demand from institutional investors, private banks and family offices is driven by the general outperformance in private assets versus the stock market. As a result, there is a lot of money sitting on the sidelines waiting to be invested.
That leaves little opening for retail investors to enter the market. Getting access to private equity still remains a challenge for many retail investors and many funds are still only distributed to institutional investors. Funds available to retail investors have received a lukewarm response. This is because private equity remains a very illiquid asset class, and exits can in some cases take years. Digitisation can improve transparency and give retail investors greater access, but we are not quite there yet. Regulators will need to adapt the rules in order to open up alternative investment funds to retail investors.”