As we hit the 2024 halfway point, challenging fundraising conditions continue to persist (noting a contraction of 22% in global private capital fundraising in 2023[1]), as well as a high degree of fundraising concentration to the biggest managers and general deal inactivity.

Here we provide a pulse check on the key themes within the private capital funds industry as we all collectively plot a course forward for our respective businesses and specialisms. The key industry themes of note are around liquidity, ESG, operational performance and post-COVID considerations.

Liquidity

80%[2] of the capital raised by UK based fund managers and GPs in 2023 were housed within 10% of the funds, further to this, over 60%[3] of the funds that were raised were less than £100m.

The industry has responded to the liquidity gap through innovative liquidity solutions seeking to address GP and LP-led market demand for liquidity. 46% of the $112 bn[4] in global secondary volume in 2023 was fund manager or GP-led.

Improvement in secondary pricing
Following a significant rise in valuations within public markets during 2023 and macro environment stabilisation, there has been an improvement in pricing.

Across all strategies, pricing for LP positions were estimated at 85% of NAV in 2023 compared with 81% in 2022, but still trailing behind the 92% seen in 2021.

Rise of continuation funds
Continuation funds have emerged as a prominent trend in the private markets landscape, particularly within the private equity strategies.

These funds allow fund managers and GPs to extend the holding period of their most promising assets beyond the typical lifecycle of a fund by transferring these assets into a new vehicle, the continuation fund.

They provide an effective solution for fund managers and GPs to navigate market dynamics by offering liquidity to investors and extending the period of value creation by a manager with deep knowledge of the assets with a view to optimising overall returns.

Democratisation and tokenisation
Democratisation (also referred to as retailisation) extends the offering of private capital investment strategies into less institutional routes and has been the subject of exploration for some time. There are number of barriers which appear to still permeate the industry from a regulatory and infrastructure perspective, and much is still required to educate a wider investor base.

Political perception connected to private capital investment is also relevant as there needs to be effective political will and the resulting government policy to support.

These barriers appear to be starting to reduce; for example, the EU introduced a new ELTIF 2.0 legislation which became effective in January 2024 and is a more flexible and inclusive framework supporting a less institutional investor.

Tokenisation is often discussed in the same breath through providing fractional ownership with the use of blockchain technology that could support smaller investment sizes.

“The GFSC (Guernsey Financial Services Commission) [Commission] supports innovation and recognises the role tokenisation could play in improving efficiency within capital markets. The Commission is aware of growing interest, locally and internationally, in the application of this technology within the funds sector and this is an area of focus for fund regulators globally.” (14^th May 2024 – Policy Statement – Approach to Fund Tokenisation)

Blockchain technology could also have wider implications for the industry by facilitating a more efficient transaction.

ESG

Environmental, Social, and Governance (ESG) continues to intensify within the private capital funds industry as a result of market expectations, regulatory and government intervention.

The emphasis on ESG stems from:

• Sustainability goals: Increasing pressure from stakeholders to adhere to sustainability and ethical investment practices.
• Regulatory requirements: Stricter regulations are pushing funds to integrate ESG criteria into their investment processes. Expected policymaking is anticipated to force rapid decarbonisation in the near future, driving funds to adopt more rigorous ESG standards.
• Investor engagement: There has been a massive increase in engagement from investors on ESG issues. The due diligence performed by investors is now extensive and this heightened scrutiny reflects a broader commitment to responsible investing.
• Performance metrics: Growing evidence suggests that ESG-compliant companies can outperform their non-compliant peers over the long term.

The EDCI (ESG Data Convergence Initiative) formed in 2021 and represents 425 + GPs and LPs from private equity, 4,300 portfolio companies and $28 trillion AUM.

They published data[5] which indicates that private equity ownership has a significant impact on ESG topics however performance for privately owned companies under private equity ownership on areas of sustainability is mixed relative to public companies, with some interesting themes that include:

• Decarbonisation – Private companies held for two of more years triple their use of renewable energy.
• Job growth – Private companies made 4% more net hires than public companies.
• Diversity – Private companies lagged public ones by 33 % with at least one woman on their board.

Operational performance

Market conditions are influencing a trend for private capital fund managers and GPs to perform an operating model review in pursuit of performance.

• Professionalising fundraising: Fund managers and GPs seek a route to professionalising[6] their approach to fundraising as a means to differentiate. This is likely to involve the provision of an enhanced data set to pre-empt questions and leverage technology in some way to support the consumption of that data set. Technology solutions also seek to support an enhanced investor/LP experience.
• Cost reduction: Adjustments to existing operating models and service provider change in the pursuit of cost reduction is a trend that will continue particularly if fund managers and GPs have a trajectory of reduced fund sizes and management fee pressure.

Post-COVID  

COVID is gone but not forgotten as the significant impact of the pandemic still heavily impacts working practices.

There was clearly a high spike in growth capital invested during the COVID-19 period with global growth capital invested in 2021 at $910bn, compared with $399bn in 2019 and $470bn in 2023.

Emerging fund managers who launched in 2021 would expect to find a cooling of the reception received by prospect investors when fundraising this year and into 2025.

Positive outlook for the private capital landscape

Despite the observed fundraising challenges, the private markets remain vibrant and full of opportunity as the industry is adept at adapting and innovating to offer solutions and products to challenges and market demand.

As we go into the second half of the year, there’s a cautiously optimistic outlook with interest rates expected to start reducing supported by falling inflation. This being said, as 49% of the global population is subject to an election this year, including the USA, UK and EU there will be plenty of uncertainty to navigate.

At Belasko, our full scope, tailored fund administration solution is designed to drive performance throughout the fund lifecycle. With experts based across the UK, Channel Islands and Luxembourg, and leading technology that’s customised to you and your needs, we’re well positioned to provide you with responsive, accurate and consistent support.

Please get in touch with the Belasko team today to discover more.

[1] McKinsey Global Private Markets Review 2024 – March 28 2024

[2] BVCA Report on Investment Activity 2023 – 14 of 131 Funds equated to £47bn

[3] BVCA Report on Investment Activity 2023 – 83 of 131 Funds less than £100m

[4] Greenhill, Jefferies, J.P. Morgan Asset Management. “Global Secondary Market Review,” Jefferies, January 2024.  Data are based on availability as of February 29, 2024.

[5] Boston Consulting Group – Private Equity Sustainability Report 2023

[6] Bain & Company Global Private Equity Report 2024

Operating models are currently being reviewed by a number of private capital fund managers and GPs in the pursuit to enhanced performance.

Once your objectives have been established (see previous article), there are two primary routes that may be taken.

• Scope status quo: keeping the scope of work outsourced the same.
• Scope change: change the scope by increasing the undertaking in-house or increasing the scope of outsourcing.

In this article, we explore the considerations of changing the scope of outsourcing.

Reviewing the options

In-source activities currently performed by a third-party

This involves identifying and bringing activities that are currently managed by external service providers back into the organisation.

Outsourcing activities currently performed in-house

Increasing the level of outsourcing has historically been used an option by fund managers and GPs to enhance performance by improving operational efficiency, managing risk and reducing cost.

Considerations when changing the scope of services outsourced  

• Regulatory permissions – are regulatory permissions required to undertake the activity?
• Expertise and resourcing – what level of specialist expertise and/or resourcing is required to undertake the activity?
• Opportunity cost – is there a benefit of freeing up specific resource and/or an opportunity cost of allocating additional activities?
• Systems and data strategy – what’s the strategy around in-house system capability and the maintenance of data as an asset?
• Risk management and control – will a change in operating model require an investment in procedural environment?  
• Relationship with your service provider(s) – is it likely that your relationship will change as a result of an adjustment to scope of services? Could this change provide other benefits or represent any risks?
• Contractual position with service provider(s) – if services are being terminated, what is the notice period (typically 3-6 months)?
• Time for service provider to onboard the additional services – for additional services, what’s the timeframe to onboard and embed additional services? Is there a mechanism in place to ensure additional services are embedded successfully?

Fund managers have several strategic options to consider when changing their operating models. Insourcing and outsourcing decisions should be based on a thorough assessment of capabilities, costs, and strategic alignment.

As a next generation fund administrator, Belasko has developed a tailored service offering to support you in achieving your target operating model.

If you’d like to discuss your outsourced operating model in more detail, please get in touch with Nick McHardy, our Group Head of Funds at [email protected].

Next time, we explore how your objectives may be met by keeping the scope of services with your outsourced provider the same.

Market conditions are influencing a trend for private capital fund managers and GPs to perform an operating model review in pursuit of performance. This review considers the service provided by third-party service providers such as your fund administrator.

Following the introduction of this trend in the last article, we now explore the four core value drivers and objectives that underpin such a review to assist the determination of what benefits an operating model change could bring to your business:

• Cost reduction
• Operational effectiveness
• Risk Management
• Investor experience

Cost reduction

You may be able to achieve cost saving targets without compromising on performance or quality by working differently with your existing and/or transferring to a third-party service provider (such as your fund administrator).

A new provider may be able to offer fee reductions by taking a longer-term view on the relationship or be able to leverage a more efficient operating model themselves.

Operational effectiveness

Identifying the processes and/or deliverables that take up the weight of internal resource and time may help apply focus in the right areas.

A consideration of whether there have been opportunities missed because of sub-optimal reaction times may be relevant.

Risk management

What is keeping you up at night?

Are there historical errors and/or any specific areas of discomfort that your team has over legal, tax and regulatory change which may position an adjustment to a specific part of your operating model.

Identifying areas of risk may yield a different level of interaction with your fund administrator and other third-party service providers to help manage risk better overall.

Investor experience

Fund managers and GPs are generally seeking a route to professionalising[1] their approach to fundraising. This may result in specific objectives around enhancing the investor experience on an ongoing basis or there may be some direct or indirect investor feedback that needs to be addressed.

Adjustments to processes and experience enhancements through the application of technology may be a route to attracting new capital inflows.

At Belasko, we partner with private capital fund managers and GPs to offer a tailored and fully outsourced fund administration solution to support you in achieving your target operating model.

If this would be of interest to discuss further, please do get in touch with Nick McHardy, our Group Head of Funds at [email protected].

In the next article, we explore the different options that fund managers and GPs should consider in achieving the specific objectives of an operating model change.

[1] Bain & Company Global Private Equity Report 2024

I would imagine that by now, ESG is close to being a better-known acronym than KYC in financial services. This is ultimately because ESG dominates news headlines on a daily basis and as a consequence, buyers of goods and services now differentiating where they allocate capital – seeking out businesses pushing to make a difference.  

This means ESG or sustainable finance is becoming more than just ‘buzzwords’. Capital inflow into ESG-related funds more than doubled in 2021 compared to the previous year and analysts expect ESG AUM to reach c20% of Global AUM or $33.9trn by 2026 ($18.4trn 2021) according to PwC.   

Ross Youngs, Chief Commercial Officer at Belasko, identifies how to navigate the rising waters, the impact on our clients and the business’ proactive approach to lead the way.  

How are our clients impacted? 

Our fund clients are impacted to varying degrees depending on their size and marketing plans. Many share our proactive approach and have, generally speaking, adopted two different routes depending on the level of regulation required. This includes:  

1. The Sustainable Finance Disclosure Regulation (SFDR).   
2. The Principles for Responsible Investing (PRI) : – Where SFDR has not been relevant, our clients have chosen voluntary compliance with the PRI. (The PRI is a set of ESG principles developed by investors to have a positive sustainable impact in the global financial system.) 

Unpacking the SFDR 

There are three levels of regulation applicable to funds marketed in Europe under the SFDR:    

Article 9 covers funds that have a sustainable objective /outcome. They have strict requirements on how they achieve their goals. There has been a great deal of focus on this category of fund and as such, the burden of evidential reporting is very high. This has led to c40% or $175bn of article 9 funds reclassifying to article 8.   

Article 8 is for funds that promote positive environment, social and governance characteristics but do not have those as their overarching objectives.   

Meanwhile, article 6 is for funds that do not integrate any kind of sustainability into their investment.  

These three levels of regulation can be considered stepping stones depending on where the business or fund is on its ESG journey.  

How has ESG impacted Belasko?  

The team and I at Belasko recognise that ESG has several positive impacts when successfully incorporated into business strategy. We are not required by regulation to report on sustainability however, we have chosen to partner with Terra Instinct to create a Responsible Business Policy.   

We have dedicated resources to steward the implementation of our policy which requires a group-wide committee, the definition of sustainable metrics relevant to Belasko, measurement and target setting. This resource also includes an annual report for clients and investors on our sustainable journey.    

I envisage that businesses like ours will soon have mandatory reporting on ESG areas in years to come. We deem it essential to be a leader in this area and will continue taking proactive efforts to stay ahead of the curve.  

How can we help you?  

No matter the complexity of compliance with the PRI or SFDR, there are common challenges with which we can assist.   

1. The first challenge is defining a policy of responsible investment. The policy must consider the fund’s impact on ESG factors and then set appropriate data points with which to measure and track positive impact according to the goals set.   
2. Data collection sounds easy, but it is not standardised across markets and countries so the sophistication and resource availability of portfolio companies to stream up the data sets can vary considerably. This is a major hurdle for our clients.  
3. Regulation and investor demand are evolving at pace. Our clients do not usually have internal resources to dedicate to ESG and therefore rely on Belasko to keep them advised as to what’s next and how to remain compliant.  

Belasko has developed an end-to-end solution in partnership with Terra Instinct to power auditable data collection. It is helpful to have a specialist like Terra Instinct to define policy and collect, validate and where data is not available provide reasonable industry estimates. The benefit of having an advisory expert is of critical importance to ensure data quality, meaning it is auditable and reporting to investors (on which decisions are made) is accurate and reliable.   

Doubts?  

It should be clear by now that ESG is not going anywhere and there is a market expectation to consider sustainability in our personal and business lives. We must adopt positive impacting principles going forward.  

If you would like to get ahead of the curve and prepare yourself for the ESG future, get in touch with Ross at [email protected].