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Private capital’s paths to growth

16 November 2022

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As new paths to growth open up for private capital, complexity increases for fund operations teams.

Last year was a record-breaker for private capital and this year might not be far behind. Private equity’s spending spree from the start of 2021 to mid-2022 amounted to USD1.7tn, making it by far the most successful 18-month period in the industry’s history.

Can this success continue? Private capital’s growth has been almost frictionless over the past decade, but current headwinds are of a new magnitude.

To gain a deeper understanding of the forthcoming challenges, Intertrust Group and Everest Group have conducted extensive, exclusive research of more than 150 leaders and heads of private capital firms. The result is a comprehensive report that sets out the next-generation operating framework for private capital.

There are hints that activity is slowing down, with fewer deals in the pipeline. On the other hand, private capital has plenty of dry powder and LPs remain confident in the sector’s ability to outpace liquid markets.

The likelihood is that growth will slow and fund managers will have to work harder to find opportunities and investors. More creative deal-making will be the order of the day.

But those efforts could be undermined if fund operating models are not prepared for this new complexity.

The retailisation of private capital

With high-interest rates and subdued stock markets, investors have limited alternatives. Retail investors are less discouraged by five or 10-year private equity lock-ups than they once were.

But the retailisation of the sector brings new challenges. Stock market investors have grown accustomed to easy access to detailed information, through self-serve portals and sophisticated online tools.

They may be surprised by what they find in private capital. Away from the largest asset managers, this is a sector still largely run by spreadsheets.

But as fund managers look to attract new investor groups, technology becomes a differentiator.

Private equity is a long way behind hedge funds, but fund administrators will come under increasing pressure to offer instant-access technology platforms and bespoke reporting capabilities to attract data-hungry investors.

New investor groups in private capital

Similarly, the retailisation of the sector will lead to greater regulatory scrutiny. Private capital has traditionally been the preserve of institutions. Now, as it spreads its wings, it is drawing in investor groups that require more protection.

Funds need to be prepared for greater oversight, as regulators react to private capital’s growing impact on the wider economy. They also need to keep abreast of new rules as they emerge around the world.

That’s because internationalisation is another clear path to growth. Ambitious fund managers understand that one way to sidestep fierce competition in one jurisdiction is to operate globally.

For example, the next great investment for a US private credit fund might be in a wind turbine manufacturer in the Netherlands.

In which case, US fund administrators need to know the rules around operating an SPV in Europe. And if the next investment target after that is an Indonesian auto parts business, that’s a whole new set of regulations to keep on top of.

Private credit comes of age

At the same time as spreading their wings internationally, private capital funds are spreading them creatively.

If private equity is about to enter a period of slower growth, fund managers will be forced to find ever-more imaginative ways to deploy accumulated capital.

Private credit, for one, has grown exponentially over the last few years. Real estate and infrastructure also offer plenty of opportunity.

But private credit deals tend to be highly bespoke. The responsibility for maintaining and overseeing them will lie with hard-pressed fund administrators.

A new era of complexity in private capital

All of this adds up to new complexity for your back-office team — if you have one. There are around 23,000 private equity firms globally, many of which have no operating model to speak of.

As growth targets push firms into more niche and complex areas, that will have to change.

At the top end, large players with established operations will be in the vanguard of chasing international opportunities and attracting new investor groups. Their priority is to streamline operating models, so back-office inefficiency doesn’t become a drag on growth.

In both cases, doing nothing isn’t an option. Private capital has led a charmed life up to now. But in more straitened circumstances, fund administration has to become more streamlined and cost-effective as firms pursue rockier paths to success.

Download our full report, introducing the Halo Framework.

Why Intertrust Group?

  • As a strategic partner, we offer a full-spectrum service tailored to meet all back-office needs throughout the life cycle of a private capital fund. This, against a background of ever-increasing reporting demands.
  • Our expert teams harness tools and cutting-edge technologies to eliminate costly errors in the handling of fund administration and corporate actions, investor relations and portfolio management.
  • Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.