Innovation provides much-needed resilience for private equity

Q: Investec recently restructured to create a dedicated private equity segment. How will businesses such as yours evolve to remain competitive in an increasingly complex market?

Jonathan Arrowsmith: At Investec, we have a full suite of solutions for the private equity market, covering financing at the asset level, financing at the GP/holding company level, M&A and IPO advisory, private banking as well as hedging. When you put all that together, it is pretty compelling. We are now bringing all that to market via a single private equity team, delivering a joined-up approach. This will benefit the industry as firms can increasingly think about us to solve a range of their issues. We can offer more solutions, as we have a much broader understanding of their business.  

Helen Lucas: The world of private equity is increasingly complex, and the combination of creative capital provision and advice sets us apart from the competition. Whether it’s through single asset level financing, continuation vehicles, NAV or preferred financing or an amalgamation of them, flexibility to suit the situation is key. By bringing our treasury risk solutions, private banking business and advisory services together, we have been able to create a seamless unique offering focused on every aspect of private equity. 

Q: What were the greatest challenges for managers and how have firms adjusted?

JA: If we look back at private equity over the past two decades, the interruption caused by the pandemic was a small bump compared to the dislocation that occurred during the global financial crisis. Then, debt markets were heavily impacted but this time the interruption was minimal and there were probably only three to four months last year when private equity activity was subdued.

After that period, funds got back to work quickly, recognising that government support was going to be available to support assets and there were some good deals available for those with capital. So, investors were back on the front foot pursuing core investment strategies and putting money to work beyond their existing portfolios.

HL: There were some challenges around deploying capital into the right assets at a time when management meetings had to be conducted virtually and sites could not be visited. But people found ways through that fairly effectively. There were also questions around the right structuring for transactions, with an extra layer of scrutiny around pricing that centred on trying to unpick whether any extraordinary performance or underperformance was cyclical or structural. Often funds had tracked those businesses for a while and were able to take a view on what had happened for the underlying companies.

Q: With a focus on the need to “build back better”, how will PE adapt to new ways of working in a post-pandemic environment?

HL: We learnt during the pandemic that we can operate remotely and still achieve high levels of productivity. There were challenges associated with transition, particularly on the pastoral side around supporting employees. This was notable during the period of school closures, which undoubtedly impacted women more than men.

In terms of gender parity in the profession, we have probably gone backwards rather than forwards during the pandemic. However, we do have an opportunity to change this and embrace some of the successful new working practices, where flexibility is key. On ESG more generally, there is more focus from managers.  Deals that meet ESG criteria are more attractive to investors.

We have seen the benefits of more flexible approaches to working in an industry that, historically, has been quite traditional. Many working practices will likely return to normal and it will be difficult for investors to say they will not attend meetings, but we have proved alternatives are available and can work.

JA: If you had asked private equity funds prior to covid, as to whether they would ever do a deal virtually from start to finish, they would have said no. There are still issues in transactions where parties have never met, but many deals have been done even off the back of just a few if any, face-to-face sessions. The last year has demonstrated that parts of the deal process can be handled remotely, often more efficiently.

Q: How might the future of PE differ from what has happened before? Where do you expect to see growth coming from, and how might the market shift?

JA: Private equity is not going away – it has got greater scale and reach than ever before. In the past two decades, the private equity market has generated strong returns relative to other asset classes. The year 2020 was a bump in the road for everybody and I do not see private equity suffering more than others.

For an industry that prides itself on innovation, private equity has probably not seen that much change over the past decade – continuing to receive enormous support from large amounts of debt, acquiring premium assets and creating value in those assets to generate good returns for investors. As a means of differentiating the offering to LPs, we have seen more sector specialisation. I  expect that to continue, as well as increased innovation around exit strategies.  instead of exiting the best assets, I suspect we will see far more assets rolling over into continuation funds and other vehicles, along with managers making greater use of the IPO markets, where they have been relatively unadventurous until now.

HL: Expect to see more creativity further up the capital structure, applying leverage across the portfolio using NAV products and other holding company financing. People are already showing increasing interest in those products and I envisage an increase in appetite from GPs and more acceptance on the part of the investor community.