As it has for many years, last week’s British Private Equity & Venture Capital Association annual summit took place in the ballrooms of London’s iconic Landmark hotel. Next year it will move to an unannounced venue elsewhere in the city.
The wider industry is also trying to find its footing amid a new economic paradigm. Top of the agenda were new routes to liquidity, the pivot to private credit and how much value there really is in generative AI.
Where to invest?
There was at least one AI skeptic in the room last week.
“I think we’re definitely at the peak of the hype cycle around AI,” said Petri Oksanen, partner and co-head of Europe at tech-focused private equity firm Francisco Partners. Oksanen suggested that, although there are opportunities for AI to drive productivity improvements, he has yet to see evidence of major disruption, particularly among more mature tech companies. For him, cybersecurity, healthcare IT and data remain more promising areas.
Broadening ESG strategies to encompass more than just risk mitigation was also highlighted as a significant opportunity for value creation. In particular, cleaning up supply chains.
Ashim Paun, head of sustainable investing at London PE firm Triton, pointed to the transformation of a fertilizer business—traditionally a very carbon-heavy sector—that Triton invested in. Following a tech overhaul and arrangements with clean energy suppliers, the company will produce green ammonia, a product in high demand by manufacturers looking to clean up their supply chains.
“You have a completely clean value chain and a new source of revenue, and with that comes a different valuation,” Paun said.
Biodiversity is also rising up the environmental agenda, in addition to decarbonization. Triton ultimately declined to invest in a company that was engaged in bottom trawling and octopus farming.
“Even leaving aside any potential future regulatory risks, do we want to be associated with such activities? Could they negatively affect our ability to raise future capital, to attract future companies as partners, and maybe even to attract talent as well?” Paun said.
Creating liquidity
Getting capital flowing—and the tools needed to achieve that—was unsurprisingly a popular theme at this year’s summit.
On continuation funds, Lucia Villamor, partner at middle-market PE firm Endless, warned the industry about the importance of staying honest.
“I like to put myself in the shoes of the LP and there’s two really important questions that they want to understand,” Villamor said. “One, why are you doing this? Is your main driver really to maximize value for investors, or are you doing it to improve your DPI? And two, on pricing, if you are an LP that doesn’t have the means to roll over into the new vehicle, are you effectively being forced to take in a really big discount? In most cases, continuation funds are being used in the right way, but you can run the risk of having angry LPs if not.”
Harriet Steel, global head of clients at private debt specialist Pemberton, also predicts a continued expansion in the use of net asset value, or NAV, financing, believing it is set to become “probably one of the fastest areas of growth in private credit over the next several years.”
Although this type of financing is regarded by some as potentially risky, Steel suggested that when used against seasoned and proven assets, it is a valuable way to liberate some liquidity and capital to GPs.
Democratization challenges?
Democratization of market access continues to be a popular topic and a potentially valuable source of new liquidity. However, it comes with challenges, including how to manage opening up possibly sensitive information to a wider audience.
“We have a very particular approach to ensure that clients understand the importance of the privileged information that we share with them, that they don’t start forwarding emails to people and chatting about it, because it’s not in the public domain,” said Lorna Robertson, head of funds at Connection Capital, a firm that offers private equity investments to high net worth individuals and family offices.
Sanjay Gupta is head of co-investments at Moonfare, which operates a platform that enables high net worth individuals to invest in the private markets. Gupta agreed that firms such as his have a clear duty to GPs in how they handle sensitive information, but that this is balanced against the need for greater transparency in other areas.
“The best investor dynamic is that we have greater transparency of fees, but we also observe strict rules on what we disclose on the underlying portfolio,” Gupta said.
One audience member asked: “Should more established investors be worried about their clout in the market being watered down by a wave of democratization?” Gupta felt they were unlikely to feel any immediate threat.
However, Claudio Siniscalco, founder and managing partner of Fiduciary Co-investment Partners, suggests that in the co-investment space the market dynamics could change quite substantially.
“Historically, I would say that there were 40 or 50 institutions that I saw again and again in every management presentation I went to over the last 20 years of doing this,” Siniscalco said. “I think that privileged group of co-investors is going to be disrupted.”
Banks squeezed out?
It’s not only traditional investors that could be squeezed. Discussion also turned to whether banks would soon find themselves out of a job in the lending markets.
“There’s stuff that we would never want to do, but I think the direction of travel of increased market share by direct lenders is only going in one direction, especially in Europe,” Steel said.
She also protested the term “shadow banking” that is sometimes used to describe nonbank lending and its negative connotations. She suggested the direct lending industry is playing a vital role in providing capital that otherwise would not be available.
Mindset shift
What next for Europe’s private markets then? Francisco Partners’ Oksanen believes they should look to the US for inspiration.
“At FP, when we’re brainstorming around the next proactive efforts we want to initiate, we often look to the US market and say ‘What’s a play that someone’s done there that we don’t think has been done yet in Europe?’ You’d be surprised the number of times that can deliver an interesting opportunity,” he said.
Oksanen also believes Europe’s founders should be more ambitious.
“I remain amazed at the number of times we’ll meet with companies in the UK and Europe where they’re very happy with their existing patch, whether it’s geographically or their position within the market,” he said. “And I don’t think folks necessarily think as expansively as they could or as many do, for example, in the US.”
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