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Growing complexities of private capital will accelerate after the pandemic

5 May 2021

Chitra Baskar

President, Fund Solutions

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Chitra Baskar

President, Fund Solutions

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Private equity investing has, historically, been driven by human capital. Knowledge and expertise plus an extensive network of contacts have been the essential requirements for sourcing and executing deals.

But the industry is changing rapidly and is set to take off as the world recovers from the pandemic. Increasing complexity is entering the equation. The volumes of data that must be handled are rising exponentially, regulatory pressures are growing and, as deals become more international, the list of rules and market nuances the fund managers must address is skyrocketing. The challenge now is for general partners (GPs) to keep control of their processes in an ever-changing world.

A growing market

The private equity market is certainly growing. It is expected to rise from US$4.42 trillion globally in 2010 to US$9.11 trillion in 20251. Private debt is adding to the mix; over the last decade or so, financing previously provided by the banks has been steadily replaced by private debt, some of which has been provided via funds offering high returns in an ultra-low interest rate environment.

As the private capital sector grows, it is becoming more complex for a variety of reasons.

First, the structure and nature of the deals being done are becoming more sophisticated. The geographic spread of portfolios is a major contributor to this. As GPs increasingly seek cross-border opportunities, they are calling on local offices more and more, to address tax structures and manage assets. If limited partners (LPs) are also spread across different tax regions, bespoke structures and separately managed accounts must also be set up.

Second, LPs are becoming more demanding. Research2 we commissioned and outlined in a report entitled The future private capital CFO: Evolving in a digital age in partnership with Global Custodian, shows that CFOs at private capital funds expect their LPs to require data updates with increasing frequency over the next decade. Almost two thirds (64%) of respondents expect their investors to be looking for access to live or daily updates on portfolio performance, 57% expect this on cybersecurity, 51% on environmental, social and corporate governance and 50% on operational service level agreements.

CFOs must meet their own requirements

But these LP demands are just some of many needs that CFOs must meet. They also have their own requirements, including data needs, automation of workflows, management of fund accounting and reporting and by no means least, access to robust due diligence.

Having access to the right technology and data to address this is essential. But this is a constantly evolving need, especially if CFOs wish to keep pace with the tools being used by dealmakers.

A faster-moving world

Whereas in the past, in-house solutions had much longer shelf lives – not least because they had to deal with less complexity – the reality now is that the private capital arena is becoming more sophisticated and faster moving.

This transformation makes it harder for GPs to keep pace. They can consume a lot of time, effort and expense ensuring their in-house operations provide the platform they need to compete, or they can partner with a high-quality services provider that can deliver state of the art technology and industry best practices.

Crucially, this option still gives GPs control over processes, but it removes major distractions, allowing them to direct their human capital on what it does best, which is raising and deploying capital.

Complexity will accelerate

The Covid-19 pandemic has stalled the private capital market for the past year or so, but we are already seeing activity returning and we can expect double-digit growth over the next three to five years, outstripping many other areas of asset management.

This growth will create many opportunities for private capital asset managers – but to take advantage, they will need to be able to manage the complexities this brings.

1Source: The Future of Alternatives 2025 (Preqin, November 2020)
2Source: Global Custodian in partnership with Intertrust Group; a global sample of 300+ chief financial officers at private capital funds were surveyed between 20 November 2020 and 26 January 2021