Although we are in the midst of a health crisis, the longer lifecycle of private equity, venture capital and even real estate funds means that investors have to capture the immediate impact of the pandemic but also take into account the long-term effects. A private equity fund is set up as a closed-ended fund for a minimum of five or six years, and sometimes up to ten. “The recent stats on fund activity in Luxembourg show a rebound of total number of assets, which signifies not a rise in value of assets but new money and subscriptions,” says Fèmy Mouftaou, Chief Commercial Director for Luxembourg at IQ-EQ.
We are pushed to find innovative ways to delegate tasks to people on the ground, to conduct due diligence and capture accurate data in a professional way without being there physically.
For all in the financial sector, the crisis activated a business continuity plan. Security is not only a challenge but a must-have when setting up a private equity fund. People are exercising more caution about the risks of cybersecurity following the significant increase of attacks during the spring lockdown. When setting up a fund, security protocols are included to ensure transactions are conducted in a fully transparent way, and the use of digital signatures has fast-tracked to become a new standard to ensure the validity of transactions. “We are pushed to find innovative ways to delegate tasks to people on the ground, to conduct due diligence and capture accurate data in a professional way without being there physically.”
Different thinking and matching demands
The crisis has accelerated a search for new kinds of investment and strategies, with many more requests connected to ESG, impact funds, venture capital, biotech funds, pharmaceuticals and all funds in industries related to the crisis. “A year ago, a third of managers would ask about ESG when preparing a fund set-up, not only for metrics reporting but also in terms of the provider’s internal ESG guidelines. Now, it’s more like two thirds,” explains Mr Mouftaou. “While our ESG platform enables us to report back to investors and stakeholders on those principles, there is certainly added pressure as the question turns from what we can do to who we are and how we behave.”
Young talented individuals want to know about work-life balance, team diversity, staff health and wellbeing initiatives.
In parallel, the crisis has influenced many people, clients, investors and job applicants to think differently and ask other types of questions. In addition to meeting the needs of our clients, IQ-EQ is to striving to meet the demands of our new joiners and target recruits. “When hiring, the discussions more than ever before tend to focus on who we are, what we stand for and our ESG principles. Young talented individuals want to know about work-life balance, team diversity, staff health and wellbeing initiatives,” says Mr Mouftaou.
Private equity is impacted because it anticipates future values. It is also driven by the large institutional investors like EIB, EIF, EBRD, FMO, which already have ESG principles embedded in their policies, explains Mr Mouftaou: “When they invest in private equity funds in Luxembourg, they try to align their own policies to create an ecosystem with the same values, which the fund manager then has to comply with.”
Building a new model
The questions fund managers have to ask are: will it be a short- or long-term crisis? How long are we going to suffer from the impact of it? Finally, and most importantly, which sectors will be heavily impacted and which will thrive? Confinement incited changes in behaviour, in particular the use of online retail, communication and entertainment services. “Private equity fund managers need to evaluate the impact on behaviour and spending following the crisis, and how fast investors can adapt their strategies to capture those opportunities,” says Mr Mouftaou.
The choice of asset classes where fund managers are going to invest will be different. Behavioural changes mean that where people choose to spend money is different already. The challenge now is to build a new model to anticipate where people will spend money and then create value. This sort of reflection is slowing down the decision process but private equity managers need to keep asking: what are people going to want and how are they going to behave in the future following the crisis?