Private Equity Industry Powers Ahead 2022

The Private Equity industry is likely to change dramatically over the next three to five years as it opens up to a much broader range of institutional and retail investors. Governments’ post pandemic demand for new capital to drive investment and economic growth looks set to combine with investors’ search for long-term, above inflation yield and portfolio diversification.

Historically, private credit markets have remained closed to a range of professional and retail investors. That situation is changing quickly in 2022 with a number of recent regulatory developments broadening the spectrum of professional investors able to access private equity investment, a range of the world’s largest funds listing on the public markets and a number of exciting rapidly growing Fintech digital investment platforms accelerating retail investment in the sector. If moves in global regulation continue, the impact for the Private Equity industry is likely to be significant with many fund managers now looking beyond the traditional 10 year, closed end, limited liability partnership structures that have been the standard over the last two decades.

In a world where the numbers of publicly listed companies have declined over the last ten years, there is clear demand for greater investor access to private markets to secure diversification beyond listed equity and fixed income securities. Today, US pension schemes only invest US$1 for every US$15 in private equity and for retail investors that ratio is US$1 for every US$40 (Preqin) – that leaves a lot of room for expansion in a world where the traditional 60% equities and 40% cash and bonds portfolio model is consigned to the history books. Last year the biggest, most experienced Private Equity funds raised the most money on record and completed the biggest ever deals and total buyout deal value doubled to in excess of a record US$1trillion. Today, Private Equity managers worldwide have in excess of US$3.4 trillion in committed but uninvested ‘dry powder’, three times the level a decade ago. Higher inflation is only likely to accelerate investors’ pivot to private markets where returns have consistently outperformed fixed income securities and public markets even allowing for higher fees and a lack of dividends.

Global regulators’ recent moves to open up private markets to a broader range of US and international investors have continued through the pandemic. In the USA, employee-sponsored defined benefit (‘DB’) plans, such as the pension funds of public sector workers, have been permitted for many years to include buyout funds in their portfolios and their money has supported much of the growth in the private equity industry. But, mid-2020, the US Dept. of Labor issued guidance confirming that defined contribution (DC) pension providers, including 401(k) plans, could now incorporate private market investments into their portfolios; as a result, over the last two years a broad range of traditional North American DC investors managing in excess of US$6 trillion in assets have accelerated ‘Alternative’ strategies targeting US and European private credit markets and opening international offices post the pandemic.

Europe has seen similar developments; in November last year the European Commission revised its European Long Term Investment Fund (ELTIF) regime allowing the listing of closed end private market funds. Separately, 2020/21 saw a range of open-ended, ‘evergreen’ private equity funds launched by major private equity firms and a growth in listed investment trusts that have created liquid ‘wrappers’ that are themselves invested in private equity either directly into single managers or across a defined portfolio. Today, there are in excess of 200 private capital vehicles that are listed on major exchanges and that number looks set to grow this year. Of course, simply looking at returns ignores the material differences in financial leverage being used in the private versus public markets and the differing risk/reward dynamics; but, as part of a diversified portfolio strategy, the arguments for including private market investments are compelling.

Listed Private Equity firms, gained nearly US$240bn in market value in 2021; amongst other objectives, these 10+ listed players judged that being public has facilitated access to far larger pools of capital than could be secured from raising capital privately allowing them to pivot to becoming global diversified asset managers. Importantly, recent Private Equity IPO’s have been able to be offered with public shareholders primarily having exposure to the fund’s management fee income with a majority?of performance based profits being retained by the private shareholders – a very attractive structure for the industry and one that is likely to fuel further European Private Equity IPO activity post current short term market volatility.?

Separately, the rapid growth of a number of exciting European Fintech digital private markets investment platforms since 2020 and the rapid pace at which their assets under management and registered users are increasing in 2022 looks set to accelerate retail investment in private markets. Today, these platforms are targeting tech savvy, high net worth individuals who qualify as professional investors and minimum investment amounts are relatively high; but, many in the industry speculate that these minimum investment levels will reduce and the use of crypto currencies and block chain technology will accelerate these platform’s growth over the next five years.

Of course, there are some issues for the industry to overcome. How do funds provide cash liquidity in a world where private capital may be locked into investments for a number of years? In the UK, Brexit and COVID concerns resulted in high profile liquidity issues for a number of real estate funds and highlighted the perils of maintaining insufficient cash on balance sheet. Separately, how do funds provide transparency on performance, governance and portfolio valuation in an environment where there is a lack of market data??

Despite these challenges, the Private Equity industry looks set to continue to power ahead in 2022 and beyond, embracing new technologies to drive economic growth. ?