Q3 2020 - (released November 2020)
SA's quarterly Private Equity & Venture Capital magazine
How will GPs and LPs adapt to the new normal?
by Jacolene Otto
While the COVID-19 pandemic has dented economies badly, downturns always reveal pockets of investment opportunity. One of these is private equity which is currently sitting on mountains of dry powder – an estimated $2.5 trillion (at December 2019) according to Bain & Co.
This extent of dry powder points to vast opportunities that are likely to open up in the coming years, especially as governments and the private sector seek to boost economic growth through infrastructure projects. Another major current and future investment trend is in technology where private equity is also able to unlock opportunities.
How will GPs and LPs change to the new normal?
There are likely to be some changes in the way GPs and LPs interact and collaborate. LPs can see that there are opportunities and they will need GPs to demonstrate how they are planning to take advantage of these opportunities. There will likely be increased communication between GPs and LPs with each trying to understand the other’s perspectives so that they can collaborate to the benefit of investors.
There will also be stronger communication between GPs and portfolio companies. Portfolio companies need to reveal their strategies and processes in more detail, in order for GPs to understand the potential risks before allocating capital and resources to help mitigate these risks.
The largest asset allocators in the private equity industry are institutional investors such as pension funds and development finance institutions, who invest in private equity knowing it is a long-term play. As LPs, they will be looking at how their GPs have responded to the crisis and adjusted to manage risk. Asset classes will be impacted to varying degrees by the pandemic - LPs are focusing on how GPs are responding to this and helping their portfolio companies to stabilise throughout the pandemic.
In short, a positive outcome from the bleak COVID-19 landscape is that communication and transparency in the private equity sector will improve, which can only bode well once dry powder starts being used.
Investment trend to ESG
ESG is nothing new to the private equity industry, with allocators such as development finance institutions allocating millions to ESG investments. But what is now clear is that ESG is no longer a tick-box exercise in the due diligence process. Daily, the investment media write about a changed world post-COVID-19, a more caring world where precious resources are safeguarded and communities are helped through infrastructure investment, with a concomitant focus on governance.
And so, there is likely to be a greater focus on understanding ESG factors, particularly governance and the impacts on underlying portfolio companies, regardless of whether a fund has an ESG focus.
Work from home – has it hindered private equity?
Enhanced Business Continuity Plans (BCP) are forcing firms to identify weaknesses and tackle issues head on. Key service providers have been subjected to even more stringent oversight. For example, do firms understand the BCP plan of their administrator and how that impacts their business and the service they receive?
Technology, of course, has come to the fore with virtual meetings enabling more or less business as usual – and making business more efficient as the need for travel is obviated. Indeed, fund raising and deal making have continued with GPs, LPs and portfolio companies adapting quickly to continue meeting prospective investors and investments virtually.
Managers are continuing to complete transactions remotely. Board meetings, due diligence and document signing are all being done remotely and while this will return to some normality after lockdown, it should help to streamline certain processes.
In sum, private equity appears not only to be adapting well to the new circumstances, but changes have led to positive behavioural trends. The industry will truly take off again once that mountain of dry powder starts to be catalysed.
Otto is Head of Private Equity & Real Estate, Maitland