The global private equity industry is currently in a state of transition. US-China ‘trade wars’ and the uncertainty that still remains around Brexit are just two aspects of the broader geopolitical and economic landscape that are affecting investors’ decision-making processes.
Alongside this are regulatory and transparency requirements that are having an impact on the way fund managers are running their businesses. Meeting increased reporting and compliance requirements is time-consuming and costly, and is forcing many GPs to reassess their operational models – not least whether to keep certain functions in-house or to outsource to third-party service providers.
While all of the above may be creating ongoing challenges for private equity, it is also driving innovation in the way GPs react and move their businesses forward. Technology certainly has a role to play, although up to now that role hasn’t yet been clearly defined. Meanwhile, types of funds, investment approaches and sectors, and preferred global regions are constantly being reviewed.
It is against this broad backdrop that Vistra conducted a research study into the current state of private equity so that we could truly get a sense of the temperature of the industry from both a global and regional perspective.
Our aim was to identify the key trends in PE and how they are changing and influencing investor behaviour, and how this is more broadly affecting the industry. The outcome of the study was our recently published white paper ‘Private Equity: Where Challenges Meet Opportunities’, which focuses on six key areas.
A dominant theme throughout the report was the increased demand for greater information, with regulatory reporting and portfolio performance data high on the PE agenda. These demands for information are having a knock-on effect on the technology used to deliver the data, as well as managers’ decisions on whether to outsource particular functions.
Indeed, the evolving role of technology featured strongly in the report. While a vast majority of respondents feel that technology could be a major enabler of change, there was no clear idea as to how that might play out. A lack of standardised platforms and systems to manage data were seen as stumbling blocks. And cybersecurity, a matter of concern to individuals and businesses everywhere, was viewed as the biggest threat facing the industry for at least the next five years.
Likewise, regulation and transparency continue to pose challenges across PE. The increased compliance burden has created numerous pressure points and the general consensus was that the level of regulation will become more difficult and complex in the next three years. Respondents were having to prioritise mandatory regulation over transparency best practice, such as the Institutional Limited Partners Association (ILPA) guidelines. That may change, however, if investors start mandating ILPA compliance.
Indeed, the relationship between LPs and GPs created some of the most fascinating points in the report, not least around outsourced relationships. While the use of third-party providers was seen as being on the rise, it was also noted that some LPs are not only mandating outsourcing, but are also keen to influence the choice of provider.
The report also asks ‘Is ESG the new normal?’ – and examines how environmental, social and governance (ESG) investing and socially responsible investing (SRI) are increasingly gaining traction. While providing new avenues for investment, there are concerns that ESG/SRI will create more work from a compliance and transparency perspective.
Finally, the report examines which emerging markets are expected to provide the biggest opportunities as well as which established markets are going to be the real standouts in the coming years.
With Vistra being positioned at the centre of global PE, there were many findings that tallied with our day-to-day experience – yet there was plenty of food for thought and results that came as a surprise.
The full report Private Equity: Where Challenges Meet Opportunities can be viewed here.
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