Big changes are ahead for private markets after the pandemic, Audrey Nangle, director of Private Equity & Real Assets at the Tokyo-based MUFG Bank, said in a recent report. Investment styles, deal-making frequency, closures of small funds, due diligence, and other factors associated with the industry will all be impacted.
Overall, Nangle predicted an acceleration of trends that have already been in action since before the pandemic, such as the concentration of private markets funds. Fundraising declines perpetuated by ubiquitous financial declines could make it difficult for smaller fund managers with less popularity to hit their targets, which would lead to top GPs soaking up the excess capital that would have been partially allocated to these smaller funds. This would make both their net asset values and market share even higher than before.
Distressed debt funds with dry powder might find a lot of near-term opportunities, since the chances of many businesses going belly-up has increased, and those that do would become ideal targets for these funds, Nangle said.
But an evolved landscape could lead to other fund managers expanding past their stated investment focuses to capitalize on the opportunities generated from the market turbulence. This might lead to a heightened demand for private markets experts, or maybe even the acquisition of talented firms with valuable experience.
“Hedge fund managers, for example, are launching private equity and debt funds,” Nangle said. “Smaller investors are moving into venture capital that allow more modest commitments.
“Hybrid funds, with characteristics of both hedge and private equity funds, are also on the rise. Many investors expect hybrid funds to offer more predictable liquidity and better cash flow, helping to boost the probability of long-term success, even in the midst of a crisis.”
Deal-making might take a hit from increased scrutiny and extended due diligence, partly perpetuated by wary investors trying to stay as safe as possible after losing so much capital. These investors will demand greater magnitudes of transparency from their partners, and Nangle said there is more and earlier negotiation over fees, in some cases occurring even during a fund’s inception.
“On the regulatory front, Alternative Investment Fund Managers Directive (AIFMD) is mandating greater transparency,” she said. “That may be reassuring to investors but it comes with a literal cost, as both time and monetary resources are being used to meet the requirements. As these expenses are paid for by the funds, ultimately the limited partners are picking up the bill.”