Updated on: July 17, 2023
Private equity has been around for more than 40 years, mostly as the exclusive domain of large institutional and ultra-high-net-worth investors. In the past decade, the industry has experienced transformational growth as more investors have gravitated to the asset class for its performance potential, and as innovative technologies continue to make access easier.
The last two years, however, have been challenging for private equity as weak economic activity, geopolitical concerns, and tight credit markets continue to exert pressure on valuations and slow investments and realizations. As a result, managers find themselves at a critical crossroads. The pressure to perform has never been higher, the competition is ultra fierce, and there is growing motivation to try new ways of doing things, and to get out of typical comfort zones.
“Firms and portfolio companies that cling to their traditional playbooks will likely find themselves falling further behind in a world that values speed, digital prowess, and greater attention to ESG issues. Non-traditional players are moving faster, paying more for investments, and competing for talent and expertise in areas that were once dominated by private equity.”
- PwC Private Equity Trend Report, 2023
One way they’re showing this is through increased outsourcing of back-office functions such as accounting, compliance, or fund reporting. Private equity managers today have the dual challenge of focusing on their core strengths while keeping pace in other mission-critical areas such as changing regulatory requirements, back-office processes, technology, and talent management. At the same time, stakeholder expectations have risen. To avoid falling behind, more and more firms are choosing to outsource these and other key functions to outside partners.
On the regulatory front, European managers bear a particularly heavy burden in trying to navigate and keep pace with a complex web of rules that continue to evolve. Managers need to be attuned, for example, to the Alternative Fund Managers Directive (AIFMD), General Data Protection Regulation (GDPR), and Anti-Money Laundering (AML) rules, and understand the implications for cross-border deals and transactions.
Capturing Data, Increasing Efficiency
Data is king in private equity. Investment professionals need the very best data available to make the best decisions for their clients, and senior business leaders need smart data for strategic decision-making. Meanwhile, investors are increasingly requesting detailed data from GPs about prospective deals, cash flows, and underlying investments, and they want this information in real-time. For European fund managers engaged in cross-border investment activity, this can be a tall order. As they look to improve how they collect and organize data, many are enlisting outside partners to help them implement better reporting systems, optimizing certain back-office functions, and adopting new technologies to automate processes where it makes sense for the business.
The ESG and Sustainability Factor
For many managers, integrating environmental, social, and governance (ESG) practices into investing strategies and managing ESG-related risks and opportunities are essential but very difficult to handle in-house. In recent years, the increased awareness around ESG issues and how they can affect investments has spurred demand from investors for more specific data around ESG financial reporting and measurement.
As it rises in importance, ESG is also developing into a more complex and sophisticated aspect of finance. Standard key performance indicators (KPIs) are now at the core of sustainability-linked loans in which rates are directly connected to achieving these objectives, and both finance providers and sponsors continue to seek ways to link finance directly to ESG targets.
Recruiting has been tough across most industries in the past two years and private equity is no exception. Finding skilled professionals with expertise in deal sourcing, investment analysis, operations, and portfolio management is extremely challenging today, especially in key financial centers. Across Europe, stringent regulatory regimes can make it difficult for private equity firms to hire outside of the European Union.
In a recent industry survey, nearly two-thirds (65%) of CFOs named talent management as their top strategic priority after asset growth. (2) (EY, Global Private Equity Trends, 2023) Whether it’s hiring to scale with a business’ growth, retaining top talent, or implementing diversity, equity, and inclusion (DEI) programs, managers need to stay constantly focused on talent to stay competitive.
Some key factors that should be top of mind:
At the end of the day, a firm’s operational and support staff should be just as committed to constant improvement and excellence as its investment professionals and dealmakers. Good performance plus satisfied clients equals success.
Fund administrators like Gen II can help firms adopt and implement new technologies, mitigate a wide range of risks, add specialized expertise in key areas, and ensure the human capital and resources are in place to succeed.
Published on: June 16, 2023