From AI and climate risk to reinventing the IPO, the UK’s private markets industry seems to have its eye on future-proofing itself.
At the British Private Equity & Venture Capital Association’s annual Summit on Thursday, the community gathered in the shadow of St Paul’s Cathedral in London to discuss what’s next for an industry in the middle of a fragile recovery.
Liquidity solutions and the new government’s response to the UK’s funding gap were some of the many topics discussed.
VC rebounds but funding gap remains
Investors struck a bullish tone regarding the UK’s near-term prospects during a panel on the future of VC dealmaking.
Richard Anton, a general partner at VC firm Oxx, noted that deals have been on the rise in recent weeks and was optimistic that the next few quarters will be much busier than in the first half of the year.
One problem the UK does face, however, is a significant funding gap, particularly for late-stage and deep-tech startups, that professional services group Aon puts at £15 billion.
Juliet Rogan, a managing director at HSBC Innovation Banking, pointed to recent data from VC Phoenix Court Group that found that the UK has similar funding levels to the Bay Area when it comes to early-stage startups. But for larger deals, the disparity between the UK and the US is significant.
It’s this funding gap that the UK’s new Labour government has pledged to fix, according to City minister Tulip Siddiq.
“UK companies, despite their commercial merits, are finding it hard to raise substantial growth capital in series B and C funding rounds,” said Siddiq. “[This] makes it harder for existing companies to scale effectively in the UK. And it means collectively, we fail to reap the rewards of our entrepreneurs. But I want to change that and this government wants to change that.”
AI capabilities
The potential for PE managers to use AI to research new sectors, enhance due diligence processes and generate real-time portfolio data already exists, but adoption is slow.
Research by Deloitte shows that just 10% of private funds had implemented AI in core functions by the end of the first half of 2023, and only 25% of PE firms are expected to be using AI to augment their portfolio valuations.
During a panel on AI adoption in PE, Jonathan Summers, executive chair at Twisted Loop—a company that helps businesses with AI adoption— said the slow uptake is due to both human and financial reasons. Fast growth seen in private markets over the past decade has meant managers have been under less pressure to adopt AI technology.
However, that is changing and firms will need to adapt, said Summers, adding that firms will lack credibility when investing in AI in the future if they are unable to implement the technology into their own operations.
Private IPOs: a viable exit solution?
As with last year’s summit, liquidity was at the top of many attendees’ minds at the conference as the exit market for both PE and VC-backed companies remains challenging.
Investors are increasingly looking for alternative routes to liquidity apart from the traditional IPO or acquisition. One such avenue is the so-called private IPO.
While not a new concept, private IPOs have been on the rise, according to Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association.
“Everyone’s thinking about liquidity,” Furlong said. “As a GP looking at portfolio companies and how to return capital to LPs, which has been difficult in the last year and a half, seeing [private IPOs] comes as no surprise.”
Instead of going to the wider public, a private IPO allows early investors to sell shares through private placements to longer-term backers such as sovereign wealth funds or pension funds. Swedish PE firm EQT brought the concept into the spotlight last year when it proposed private stock sales for its portfolio companies.
Private IPOs have the advantage of allowing PE owners to return capital to their investors without braving the harsher public markets, Hg Capital‘s head of client services Luke Finch said.
“The public markets can be quite unforgiving,” Finch said. “You need to be big enough and grown up enough to matter. [Private IPOs] are an interim step and can help lay the groundwork for a future listing while companies scale.”
Climate risks loom large
The way that the private markets look at climate risks has evolved from a qualitative perspective to a quantitative one and is now embedded in the entire investment process, said Luise O’Gorman, head of ESG transaction advisory services at Aon, during a climate panel, adding that categorizing deals into high, medium or low-risk ratings is no longer enough for the deals teams
Instead, the idea that climate risks must be translated into financial terms that can feed into valuations has come to the fore during the due diligence process.
“The level of sophistication around climate and demonstrating that sort of climate resilience has improved, and the quantification of climate risks such that you can introduce climate sensitivities in your valuation model, and speaking that language of the deals team,” said O’Gorman. “The thought process starts at D-Day and is taken all the way through to exit.”
Critically, she added, firms will have to be able to demonstrate that their assets are climate-resilient and future-proof in order for an exit to succeed.
The UK’s Economic Secretary to the Treasury, Tulip Siddiq, speaks the BVCA Summit 2024.
Featured image courtesy of BVCA
