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Perspectives 2021
December 2020/January 2021 • privateequityinternational.com
Tracking LP sentiment
in turbulent times
“Dominant The Debevoise Private Equity Group continues to
lead the field, in an industry we have helped shape
global private for decades.
equity practice With consistently high rankings from PEI, Chambers
& Partners, and The Legal 500, we have been a
with experience recognized leader for more than 40 years.
advising a More than 300 lawyers work within the Group in
Debevoise offices around the world, making us one
comprehensive of the few truly global private equity practices.
range of clients”
www.debevoise.com
Chambers Global
Contents
How to contact us
Senior Editor, Private Equity, Americas
Isobel Markham
isobel.m@peimedia.com, +1 646 380 6194
Senior Editor, Private Equity, EMEA
Adam Le
adam.l@peimedia.com, +44 20 7566 5437
Perspectives 2021
Senior Special Projects Editor
Graeme Kerr
graeme.k@peimedia.com, +44 20 3862 7491 ISSN 1474–8800 • DECEMBER 2020/JANUARY 2021
Special Projects Editor
Louise Fordham
louise.f@peimedia.com, +44 20 7566 5440
Senior Reporters
Carmela Mendoza
carmela.m@peimedia.com, +44 203 640 7512 Insight Strength in numbers 17Capital
on what portfolio finance can offer 30
2
Rod James
rod.j@peimedia.com, +44 20 7566 5453
Senior Reporter – Asia Seizing opportunities in
Alex Lynn secondaries Falling distributions and
alex.l@peimedia.com, +852 3704 4638
Seven LP opinions that matter increased capital calls are catalysing
Contributors
Amy Carroll, Claire Coe Smith, Marine Cole, sellers, says Pomona Capital 36
Jesse Koppi, Vicky Meek, Larraine Valentino EDITOR’S LETTER 8
Managing Editor, Production: Mike Simlett Subscription lines’ ESG evolution
Production Editors: Daniel Blackburn, Debevoise & Plimpton discusses
Adam Koppeser Analysis innovations in fund finance 42
10
Copy Editors: Eric Fish, Nicholas Manderson
Art Director: Mike Scorer How will Brexit shape private
Head of Design: Miriam Vysna equity in Europe? Private equity
Senior Designer: Lee Southey managers are making a pre-emptive
The sustainability shift Goldman
Designers: Denise Berjak, Pio Blanco strike, says LIS | Sanne 46
Head of Investor Research Sachs on opportunities for ESG-
Nicole Douglas oriented investors Checks and balances Vistra on why
nicole.d@peimedia.com, +44 203 879 3894
collaboration is key when it comes
Head of Marketing Solutions, Asia’s consumers look forward
Private Equity Group: to governance 52
Alistair Robinson
L Catterton discusses the impact of
alistair.r@peimedia.com, +44 20 7566 5454 changing customer habits 17 Changing of the guard Smart firms
Subscriptions and reprints prioritise ESG, says RSM 56
subscriptions@peimedia.com Standing out from the crowd
Customer Service Adams Street Partners on co- On the minds of investors Stars
customerservices@peimedia.com
investors’ need for flexibility 25 of PEI’s Future 40 ponder 2021 59
Editorial Director, US: Rich Melville
Editorial Director: Philip Borel Public and private eFront Insight on
Director, Product: Amanda Janis
Director of Research and Analytics: Dan Gunner LP Perspectives converging markets 62
14 Q&As
Managing Director, Americas: Colm Gilmore
Managing Director, Asia: Chris Petersen
Chief Commercial Officer: Paul McLean
Chief Executive: Tim McLoughlin The impact of covid-19
Investment plans,
13
expectations 20 Aware Super’s Jenny Newmarch
Co-investments 28 on climate change
Secondaries 34 DEG’s Carola Bose on Africa 33
GP relationships 40
IFC’s Jennifer McLeod Petrini
For subscription information visit Fund finance 44 on Latin America 39
privateequityinternational.com Due diligence 48
AP6’s Anna Follér on diversity 51
ESG and D&I 54
Methodology 64 ILPA’s Jennifer Choi on the body’s
D&I roadmap 58
December 2020/January 2021 • Perspectives 1
Seven LP opinions that matter Private Equity
International’s LP Perspectives 2021 Study takes the
temperature of the investor community
2
020 has been an
unusual year, to put it Seeking a step-up on To what extent do you agree that GPs are
taking the risks of climate change seriously
mildly, writes Isobel climate change enough in their own investment policies and
Markham. What Just over 40 percent say practices? (%)
started off ordinarily GPs are taking the risks of
100
enough turned climate change seriously
on a dime when the coronavirus enough in their own
pandemic swept across the globe at investment policies and
the end of the first quarter, causing practices, while 22 percent
not only a global public health indicate they are not doing 80
emergency but severe economic so. Climate change has
hardship for many. become an increasingly
And it’s showing no signs of letting hot-button issue among the
Strongly disagree
up. At the time of writing, case LP community, particularly 60
Somewhat disagree
numbers were beginning to spike in the last year, and we
Neither agree
again in both the US and Europe, anticipate investors nor disagree
with new lockdowns coming into keeping up the pressure on Somewhat agree
effect and causing renewed fears for their managers throughout 40 Strongly agree
economies. 2021.
Private equity has not escaped
unscathed. While fundraising
numbers remain robust, it’s been
20
tough for all but the most familiar
household names to raise capital.
Some portfolio companies have
been boosted by a “covid bump”
while others – such as those in the 0
travel and hospitality industries –
have been devastated. All have
been forced to grapple with new Source: Private Equity International’s LP Perspectives 2021 Study
2 Private Equity International • December 2020/January 2021
Recession becomes a reality
“ The only certain
Top of mind for LPs right now when it comes to what could impact thing about the
performance in the next 12 months is recession in core markets, which
should come as little surprise given the volatility of public markets and outlook for 2021
the increasing certainty that the effects of the pandemic will be felt
well into next year. Next in line is the covid-19 outbreak, followed by
right now is
extreme market valuations. Concern around the US-China trade war has uncertainty ”
dropped this year, likely as a result of coronavirus worries taking over.
Thinking of your private markets portfolio, which three factors will have the greatest
impact on performance over the next 12 months? (%)
0 20 40 60 80 100
ways of working. And that’s not all.
Recession in core markets The industry – and the world at large
– has also been wrestling with an
Covid-19 outbreak
increasingly acute climate crisis and
Extreme market valuations escalating geopolitical tensions. The
only certain thing about the outlook
US/China trade war
for 2021 right now is uncertainty.
Availability of leverage in That’s where Private Equity
alternative investment markets
International’s LP Perspectives
Social unrest 2021 Study, one of the most
comprehensive of the private
Cybersecurity threat
equity investor universe, comes in.
Impact of the UK’s exit from the For this year’s study, PEI’s Research
European Union
& Analytics team surveyed 100
Threat of higher inflation institutional investors to find out
what’s driving them, what’s worrying
Natural disasters
them and how they see the future of
the asset class. n
Enthusiasm cools on How will your interest in the following regions change over the next 12 months? (%)
emerging markets
Investors are showing increased Greater interest Similar interest Less interest
appetite toward the more 0 20 40 60 80 100
established private equity
markets of North America, Asia-Pacific
Western Europe and Asia-Pacific
Western Europe
over emerging markets. The
enthusiasm for Asia-Pacific in
North America
particular is perhaps a reflection
of that region’s economies Central/Eastern Europe
being further along in their
recoveries, and thus far not Latin America
facing widespread second waves
of the covid-19 pandemic. On Middle East
KKR’s third-quarter earnings call,
for instance, the firm credited Sub-Saharan Africa
its relative weighting to Asia as
benefiting its performance. North Africa
December 2020/January 2021 • Perspectives 3
Insight
A tale of two 2020s How do you feel private equity will perform against benchmarks in the next 12 months? (%)
As unintuitive as it may seem
100
in a downturn, investors have
more confidence that private
equity will exceed its benchmark
next year than they did at the
end of 2019: 39 percent expect 80
outperformance in the next 12
months, up from 23 percent
last year. However, there has
also been an increase in those
that expect it to fall below 60
its benchmark – 16 percent
Not applicable
compared with 11 percent
Will fall below benchmark
the year prior. Consequently,
those indicating it will meet its Will meet benchmark
40
benchmark has shrunk by 17 Will exceed benchmark
percentage points. This may be
a reflection of the very different
experiences investors have had
this year depending on the make- 20
up of their portfolios: those with
high levels of tech exposure have
likely seen an uptick in value,
while those with high exposure
to retail, leisure and energy have 0
2019 2020 2021
had a much tougher ride.
LPs have second thoughts Do you plan to buy or sell fund stakes on the secondaries market in the next 12 months? (%)
There’s been a slight uptick in
100
the percentage of respondents
planning to buy or sell fund
stakes on the secondaries market
80
in the next 12 months: 20 percent
intend to both buy and sell,
while 22 percent plan to just buy. Neither buying nor selling
Despite the expectation of an 60
Yes, selling only
increase in forced sellers caused Yes, buying only
by a downturn, the proportion Yes, both buying and selling
looking just to sell – 7 percent – is 40
down from 12 percent last year.
Those looking to buy could be
seeking to increase exposure to 20
managers that are benefiting in
today’s environment, while taking
advantage of potentially softer 0
pricing. 2019 2020 2021
Source: Private Equity International’s LP Perspectives 2021 Study
4 Private Equity International • December 2020/January 2021
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Insight
ESG is non-negotiable In light of covid-19, will your institution: (%)
Just 12 percent of LPs are willing Yes No
to relax their ESG policies as it 0 20 40 60 80 100
relates to private markets fund
investments in light of covid-19. Have greater appetite for distressed
debt or special situations investment
In fact, from our conversations strategies?
with the market over the past
few months, ESG considerations
are more important than ever Be less likely to invest with new GPs?
as GPs and LPs seek to ensure
their portfolios are as financially
sustainable and future-proof as
possible. Be more flexible with GPs to invest
beyond their investment mandate?
Another finding we’ve seen
playing out in the data: just over
half are less likely to invest with
new GPs. This is likely down to a Be more active on the secondaries
desire to stick with the tried-and- market as a seller?
tested during times of distress, as
well as the practical difficulties of
conducting due diligence on new Relax your ESG policy as it relates to
private markets fund investments?
managers remotely.
Built to last
Private equity investors are pretty happy with how asset classes surveyed as part of the study. This may
their GPs have been structuring their deals: 72 percent be driven by how well private equity portfolios have
indicated they were at least somewhat confident deals held up thus far, aided by government interventions,
had been structured sensibly enough to withstand the persistently low interest rates and a rapidly recovering
downturn. This compares favourably with the other (although still volatile) public market.
How confident are you that your GPs’ deals have been structured sensibly enough to withstand the downturn? (%)
Very confident Somewhat confident Neutral Somewhat not confident Very not confident
0 20 40 60 80 100
Private equity
Infrastructure
Private debt
Venture capital
Private real estate
Source: Private Equity International’s LP Perspectives 2021 Study
6 Private Equity International • December 2020/January 2021
Private equity fund administration and beyond We cover every aspect of private equity administration, from investor onboarding, to fund administration, to middle and back office support, to treasury services and more. Whether you’re restructuring or exiting, we can help your portfolio companies expand and operate globally. We use the best-in-class technology to remove back-office headaches, increase transparency and lower risk for your organisation. Learn more www.vistra.com/private-equity Seizing a world of opportunity This document is subject to, and must be read in conjunction with our Legal Notice (including Disclaimer) at www.vistra.com/notices. Copyright © 2020 by Vistra Group Holdings SA. All Rights Reserved
Insight
Editor’s letter
Private equity’s resilience New York
130 West 42nd Street
Suite 450
offers comfort
New York
NY 10036
T: +1 212 633 1919
London
100 Wood Street
London
EC2V 7AN
T: +44 20 7566 5444
Isobel Markham Hong Kong
Isobel.m@peimedia.com 19F On Hing Building
1 On Hing Terrace Central
Hong Kong
T: +852 2153 3240
A
Private Equity International
t a Private Equity International conference in November, I asked an Published 10 times a year by
PEI Media. To find out more about
investor panel what had surprised them the most in the way private PEI Media visit thisisPEI.com
markets had reacted to the coronavirus pandemic and subsequent
© PEI Media 2020
lockdowns. The one thing all the panellists mentioned: the resilience of private
equity portfolios in the face of such a turbulent year. No statement in this magazine is to
be construed as a recommendation
That resilience is likely to be what has led to LPs’ positive evaluation of the to buy or sell securities. Neither
private equity market in this year’s LP Perspectives 2021 Study. Just 8 percent are this publication nor any part of it
may be reproduced or transmitted
looking to invest less capital in the asset class over the next 12 months, while in any form or by any means,
a healthy 45 percent are looking to electronic or mechanical, including
photocopying, recording, or
shift more capital into private equity –
considerably higher than we found for “ Investors are by any information storage or
retrieval system, without the prior
other alternative asset classes. putting their trust in permission of the publisher.
Whilst every effort has been
This does not mean smooth sailing, made to ensure its accuracy, the
for investors or for fund managers. the asset class as a publisher and contributors accept
no responsibility for the accuracy
Unsurprisingly, more LPs this year steady pair of of the content in this magazine.
Readers should also be aware
indicated their PE investments have
fallen short of benchmarks in the hands ” that external contributors may
represent firms that may have
an interest in companies and/or
last 12 months. While fundraising their securities mentioned in their
numbers for the year look robust thus far, that capital is mainly concentrated contributions herein.
in the hands of the largest managers – in fact, PEI data show only 3 percent of
Cancellation policy You can
capital raised across private equity, real estate and infrastructure in the first half cancel your subscription at any
of the year went to first- or second-time funds. time during the first three months
of subscribing and you will
But despite the challenges, one thing is clear: investors are putting their trust receive a refund of 70 percent
in the asset class as a steady pair of hands when all else is uncertain. of the total annual subscription
fee. Thereafter, no refund is
available. Any cancellation request
needs to be sent in writing to
the subscriptions departments
(subscriptionenquiries@peimedia.
com) in either our London or
New York offices.
Printed by Stephens & George Ltd
stephensandgeorge.co.uk
Isobel Markham
8 Private Equity International • December 2020/January 2021SEE
With eFront, you can
manage private assets
and funds in your
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IT ALL
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www.efront.comAnalysis
K E Y N O T E I N T E R V I E W
The sustainability shift
The current environment may produce opportunities for ESG-oriented private
markets investors, says Ken Pontarelli, who recently returned to Goldman Sachs to
lead a new sustainable investing group in the firm’s Alternatives business
Environmental, social and governance amounts of capital for us to stay on the
SPONSOR
investing has been top of mind for right side of the climate ledger, for ex-
GOLDMAN SACHS
many investors over the last few years, ample.
but the events of 2020 are likely to give On the commercial side, we now
this theme – and its more focused cous-
in, impact investing – additional mo-
mentum. The visible effects of climate
Q You have been
investing in ESG-related
opportunities for many years
see compelling tailwinds driving ESG
investment. Even if you do not have a
personal interest in ESG, it is hard to
change, a pandemic and social unrest now. Why did you become ignore the financial case today for in-
have created a renewed focus on sus- interested in this area? vesting according to these principles.
tainability from both the business com- I started to focus on impact investing
munity and broader public alike.
This trend is likely to have knock-
on effects for private investments. We
through a combination of deeply per-
sonal views and the commercial ben-
efits of investing according to ESG
Q After leaving Goldman
Sachs in 2017, you
established your own firm,
caught up with industry veteran Ken principles. Mission Driven Capital Partners.
Pontarelli, who recently re-joined We have a climate crisis looming What was behind that move?
Goldman Sachs as a partner to lead a large and there are many pressing so- I saw a gap in the market. I care deeply
new group focused on sustainable in- cial issues that need to be addressed. It about social and environmental issues,
vesting in the firm’s Alternatives busi- is evident that these challenges will not and there was a scarcity of classically
ness, to get his views on ESG trends be solved by government action and trained private equity investors sourc-
and opportunities in private markets. philanthropy alone. It will take massive ing ESG opportunities, so it seemed
10 Private Equity International • December 2020/January 2021Analysis
Q Has the argument around returns and
sustainability now been won?
I still see some degree of scepticism. Some people still
believe ESG investments must translate to concessionary
returns, particularly in private markets. I can understand
why; there were a few waves of “green tech” investments
that did not pan out as expected.
However, the landscape is fundamentally different
today. In renewable energy, for example, some companies
made promises around energy transition in the past, but
they weren’t on firm footing – many were funded too
early or perhaps should never have received funding.
Today, the cost of energy from renewable sources has
fallen and renewables are often more cost-effective than
fossil fuels. The kind of progress made in power and
renewables 15 to 20 years ago is starting to play out in
other areas, such as plastic alternatives and water usage.
Companies targeting these spaces now make strong
economic propositions, as well as sustainable ones.
We believe that we are on the verge of a highly
attractive ESG-oriented investing environment, and
consequently, we think that the amount of capital lining
up behind ESG in private markets is poised to grow.
like a natural move. The firm was both the chief sustainability officer and
intended to fill the gap between ear- “On the commercial the CFO, who cares mostly about the
ly-stage venture capital and infrastruc- bottom line.
ture, which is later stage and lower side, we now see The sectors we plan to target are
risk. Our aim was to provide growth fairly broad but they are all connect-
capital that generated a positive and compelling tailwinds ed by an environmentally and socially
measurable impact alongside financial conscious approach – clean energy, sus-
returns. driving ESG tainable transport, sustainable food and
agriculture, waste and materials and
investment”
Q Now that you are back at
Goldman Sachs, where
will your focus lie?
ecosystem services. For example, we
might finance a company that produces
cost-effective substitutes for plastics in
I had previously worked at Goldman packaging – that kind of product would
Sachs for 25 years, so I knew that the be at the top of the list for every major
firm’s commitment to sustainability consumer goods company to help them
was a priority for our Executive Of- meet their sustainability objectives.
fice. I could see that I would have a far
greater impact if I re-joined a firm with
significant investors and corporate re-
lationships than I could in a third-party
Q What have been the
most important recent
developments in ESG
firm. investing?
In our new group, we plan to pro- ESG investing has gained an enormous
vide growth capital to businesses with amount of traction in a relatively short
products and services that help compa- period of time. This year, in particular,
nies operate sustainably in a cost-effec- has raised awareness about the gravi-
tive way. You need to be able to satisfy ty of the problems we are facing on a
December 2020/January 2021 • Perspectives 11Analysis
global scale. The wildfires in Australia longer afford to have a singular focus
and California, for example, have real- “Many business on the bottom line.
ly personalised the impact of climate
change as we see the results unfolding
in more extreme ways than had pre-
viously been predicted. On the “S”
leaders see covid-19 as
an issue for the next
Q What are the most
challenging aspects of
ESG investing?
– social side – we have seen systemic There is a lot of focus on measure-
injustice highlighted this year, while 18 months or so, but ment of ESG metrics, and the prac-
employees, customers, suppliers and tice is evolving. It takes a significant
investors have been demanding that they recognise that amount of work and close partnership
companies operate with a higher stand- with portfolio companies to aggregate
ard of care than ever before.
climate change will be ESG information and report on an
Ten years ago, only a relatively small an issue for the next entire portfolio of investments. It can
amount of capital was directed towards also be difficult to measure both direct
opportunities that had an ESG angle; several decades” and ancillary ESG impact. That can
today, almost a third of public market lead some investors to throw up their
capital is being invested in ESG-related hands in frustration because they want
strategies. Almost every Fortune 500 a path to standardised information, ap-
company now produces a sustainabili- proaches and measures. The industry
ty report. We are starting to see sim- will eventually find an approach that
ilar developments in private markets, works well for all stakeholders, but it
where currently only a small fraction will take time.
of the capital is committed to ESG and In the meantime, we can customise
impact investments – but that is chang- metrics that are most relevant to each
ing, and I think the shift will happen company and the impact they are in-
quickly. tended to produce. The benefits of re-
newable energy, for example, are very
Q How much of an effect has
the pandemic had on ESG
investing?
different from those of substitutes for
plastic packaging, and the metrics that
measure their success should be tai-
In the early stages, there were concerns lored accordingly.
that ESG and sustainability would take
a back seat – that they were only issues
to be addressed when times were good.
If anything, the pandemic has only
Q How do you see ESG and
impact investing evolving
over the coming years?
reaffirmed the business community’s I hope that in five years’ time we can
commitment to operating sustainably. look back and say that this was a great
Many business leaders see covid-19 as time for ESG and sustainable investing.
an issue for the next 18 months or so, There is a scarcity of capital right now
but they recognise that climate change but plenty of opportunity, and that has
will be an issue for the next several dec- the potential to produce a strong return
ades. profile. This is what I was hoping to do
People now also recognise how
“There is a scarcity of when I returned to Goldman Sachs –
rapidly things can change, and that make impact-oriented investments that
capital right now but
businesses need to have the agility to generate the returns of traditional pri-
pivot and the resilience to bounce back plenty of opportunity, vate equity. And if that prediction holds
quickly from challenges. Increasing- true, it may drive other firms to inte-
ly, people are starting to realise that and that has the grate ESG into their processes. Over
sustainability plays an important role the medium term, I see the majority of
in this. Building strong and positive potential to produce a private equity firms integrating ESG
relationships with employees, suppli- until it simply becomes part of a daily
ers, customers and investors promotes strong return profile” routine, and expect a lot of opportunity
resilience – corporations today can no in this space going forward. n
12 Private Equity International • December 2020/January 2021Analysis
Q&A
Aware Super’s senior portfolio manager, Jenny Newmarch, explains how
the Australian super fund is engaging with managers on climate change
Q Aware Super is a founding
member of the Climate
League 2030 initiative to reduce
infrastructure. We recently committed
to two grid-connected battery stor-
age investments in the US which we
emissions in Australia; how do believe will be well positioned as the
climate considerations play into political tide changes and states have
PE investments at Aware Super? increasing confidence in long-term na-
A Aware Super has long held the
belief that material unmitigated
tional climate policy.
climate impacts will be value destruc-
tive to our private equity investments.
When we invest with PE managers, we
Q What are Aware Super’s
aspirations for its private
markets portfolio in 2021?
take a close look at their ESG policies,
and more importantly, practices, with
a keen focus on how much attention is
A With markets continuing to re-
main buoyant and, in particular,
venture capital markets showing no
paid to identifying climate risks in due sign of slowing down, our primary fo-
diligence of target companies, as well ESG policy for fund investments cus for 2021 is to ensure we are finding
as how companies are managed to min- due to covid-19; do you feel the most inefficient parts of the private
imise or mitigate their exposure either this year’s events have changed equity markets that can sustainably out-
directly to climate change or indirectly perceptions around ESG? perform the public markets. We envis-
through shifting climate-related poli-
cies or carbon prices.
We recently committed as a corner-
A Aware Super has not relaxed its
ESG policies as a result of cov-
id-19. We have continued to increase
age continuing to focus on mid-market
buyout funds, early- to mid-stage ven-
ture and small market growth funds
stone investor to Australian mid-mar- our focus on engaging with managers around the world.
ket PE fund Adamantem Capital Part- to establish value-creative policies and We remain cautious as to how the
ners Fund II, which has committed practices in their portfolio management. pandemic will affect different regions’
to net-zero emissions targets for all Whilst we believe there could be poten- ability to resume steady economic
its portfolio companies. We will be a tial for acceleration of sustainable prac- growth, and how continued shutdowns
member of the fund’s Emissions Re- tices as a result of covid-19 if companies can slow dealflow. Therefore, we are
duction Committee, where best prac- choose to extend remote working and increasingly cautious about dry pow-
tices will be shared amongst members. reduced international travel, our con- der and increased J-curves. We are also
Aware Super is also developing a cern is companies and consumers may monitoring our existing portfolio more
methodology to measure the emissions believe the pressure to reduce emissions regularly and are cautious to see what
of the PE portfolio to drive initiatives has abated and take it less seriously. happens to those companies that have
that support our portfolio-wide emis- We are hopeful a change in US been propped up by stimulus when that
sion reduction targets. government will see the US rejoin the rolls off. Overall, however, our private
Paris Agreement, encouraging other markets portfolios have been well po-
Q According to Private
Equity International’s LP
Perspectives 2021 Study, 12
countries to do the same. We have also
seen governments take climate consid-
erations into account in their covid re-
sitioned throughout the pandemic and
those companies that were affected by
shutdowns saw a quick bounce back
percent of LPs would relax their covery plans, such as prioritising green where those shutdowns were lifted. n
December 2020/January 2021 • Perspectives 13Analysis
Covid-19 upends the
fundraising process
Investors appear to have adapted quickly to virtual processes.
Amy Carroll considers whether some of these changes are here to stay
O
ver 90 percent of completely virtual due diligence pro-
LPs are prepared cess with a manager with whom there
to conduct initial
“The sequencing has had been no previous contact would be
meetings with
all changed and we a challenge.”
GPs virtually in “A very small number of LPs are
the wake of the need to establish what willing to invest with people that they
onset of covid-19, according to Private have never met at all,” adds James
Equity International’s LP Perspectives the new order of things Coleman, founder of Quest Fund
2021 Study. Meanwhile, two-thirds of Placement. “The majority are willing
investors will conduct fund due dili- will be” to invest with those where they have to
gence on an entirely virtual basis and complete the fundraising process virtu-
just over half – 52 percent – would be JAMES WARDLAW ally. Obviously, this dramatically works
receptive to investing in fund manag- Campbell Lutyens in favour of established groups or those
ers having never met face to face. This that have built out significant LP rela-
marks a radical departure from tradi- tionships in recent years.”
tional fundraising protocol, and while Remote working has also changed
a narrow majority of LPs may theoret- the natural course of the fundraising
ically be willing to take the leap, in re- journey. When international travel was
ality their steps may be more tentative. the norm, investors may put aside half
“After an initial freeze in March and a day to meet all the right people and
April as people recalibrated, we have conduct onsite due diligence.
seen very little change or challenge That meeting would prove crit-
and our programme has continued un- ical, according to James Wardlaw,
affected,” says Peter Linthwaite, head vice-chairman at Campbell Lutyens.
of private equity at Royal London As- “If that meeting went well, you would
set Management. “That said, targeted come out at least two-thirds convinced
funds had already been identified and you were going to get their mon-
preliminary meetings held. I think a ey,” he says. “That has now changed
14 Private Equity International • December 2020/January 2021Analysis
In light of covid-19, will your institution: (%)
Yes No
0 10 20 30 40 50 60 70 80 90 100
Have greater appetite for
distressed debt or special
situations investment
strategies?
Be less likely to invest
with new GPs?
Be more flexible with GPs
to invest beyond their
investment mandate?
Be more active on the
secondaries market as a
seller?
Relax your ESG
policy as it relates to
private markets fund
investments?
On a scale of 1 to 5, how concerned are you about other LPs potentially defaulting in funds completely. Investors are no longer
that you have committed to? (Average response)
making that significant commitment of
time and travel. If all it costs is a two-
hour Zoom call, they have nothing to
lose. What’s the next step? Is it anoth-
er Zoom call? The sequencing has all
changed and we need to establish what
the new order of things will be.”
Finding the balance
The big question is: will the fundrais-
ing process revert entirely once meet-
ing and travel restrictions are lifted?
The general consensus is that some
changes, at least, are here to stay. “A
lot of LPs are increasingly comfortable
1 (not very concerned) 5 (very concerned) with having initial interactions remote-
ly,” says Gabrielle Joseph, head of due
diligence and client development at
Source: Private Equity International’s LP Perspectives 2021 Study Rede Partners. “And a lot of GPs have
December 2020/January 2021 • Perspectives 15Analysis
Would your institution: (%)
Yes No
0 10 20 30 40 50 60 70 80 90 100
Take a first GP meeting
virtually?
Conduct fund due
diligence entirely
virtually?
Commit to a new
manager’s fund without
ever meeting face to
face?
Source: Private Equity International’s LP Perspectives 2021 Study
become very skilled at pitching re- part in the process,” she adds. “Some response to covid-19 include a lack of
motely. They will continue to use those LPs also note that eliminating the travel willingness to contemplate increased
skills to avoid unnecessary travel in the requirement has allowed them to meet latitude when it comes to GP invest-
early stages of fundraising.” with a greater volume of managers than ment strategy. Only 36 percent of in-
Joseph also believes annual meetings during normal times.” vestors say they would be more flexible
will remain at least hybrids, comprising Other key findings related to the LP with their GPs when it comes to their
both in-person formats and live stream. investment mandate. “We have been
But she adds that a question mark re- very focused on identifying any strat-
mains over the critical conference sea- egy drift amongst GPs,” says Mikael
son. “Conferences are an extremely Huldt, head of alternative investments
efficient way for us to help our clients at AFA Insurance.
build LP relationships,” she says. “The LPs have nonetheless been keen
question is whether people will feel safe to tap into sectors and strategies ben-
attending large-scale events where del- efiting from covid-19, ranging from
egates have travelled from all over the healthcare and technology, to special
world.” situations. But primarily, investors are
Certainly, LPs seem to have moved contemplating the longer-term impli-
more quickly up the comfort curve than cations of the pandemic.
we might have expected at the onset of
“Virtual diligence does “The most simple and apparent les-
covid-19, according to Jennifer Choi, allow more members of son so far, as we see it, is that diversifi-
managing director of industry affairs at cation is still extremely important to be
the Institutional Limited Partners Asso- the LP’s team to take able to withstand any black swan events
ciation. “While there are serious draw- such as this,” Huldt says.
backs to an all-virtual process, such as part in the process” “Therefore, I would guess that very
the inability to read the body language niche and narrow strategies in certain
in the room during an onsite among a JENNIFER CHOI sectors and geographies may have a
GP’s team, virtual diligence does allow ILPA harder time attracting capital going
more members of an LP’s team to take forward.” n
16 Private Equity International • December 2020/January 2021Analysis
K E Y N O T E I N T E R V I E W
Asia’s consumers look
forward
The pandemic has done little to dent demand in the region, where fast-changing
customer habits are offering up opportunities for investors, say L Catterton Asia
managing partners Chinta Bhagat and Scott Chen
Q How has covid-19
impacted consumer
demand and behaviours in Asia?
SPONSOR
L CATTERTON
hasn’t had an impact. We are focus-
ing on three areas where covid-19 has
caused shifts, with the first and largest
Scott Chen: In Asia, we have for the being remote consumption. Wheth-
most part seen a return to pre-pandem- consumption by the Asian consumer er that is remote learning, telehealth
ic levels of activity and behaviour. Chi- to continue to drive future growth in or entertainment and fitness at home,
na saw nearly 5 percent GDP growth global GDP. this is a big area of opportunity. Sec-
in the third quarter of 2020, which In terms of the pandemic’s impact ond is an amplified focus on health and
followed a strong Q2. Meanwhile, our on the Asian consumer, the key take- wellness, which includes both physical
exclusive partner, luxury goods retailer away we are seeing is an acceleration and mental health. That covers nu-
LVMH, achieved triple-digit growth in of trends that were already underway. trition and diet – we see big shifts in
China in Q3 – its online China store We have been tracking many of those Asia towards replacing beef with more
has become the largest store for the trends through our primary and sec- chicken and pork, for example. From
company globally, which is significant ondary research on consumer behav- a mental health perspective, there is a
given its large physical presence in iour and categories that are best posi- growing focus around companionship
Paris, New York, Hong Kong and else- tioned to benefit from these trends. in the form of pet ownership, and this
where. We expect the rapid growth in But this is not to say that covid-19 has been an area of strength for our
December 2020/January 2021 • Perspectives 17Analysis
firm – we now have 10 pet-related in- each at a different end of the spectrum,
vestments in our portfolio globally. All which play into these changing trends.
of these trends are areas where we have In June, we invested $250 million
investment experience. in Indian telecoms operator Reliance
Third is the evolution of retail. Of- Jio Platforms. Reliance began its ef-
fline retail is clearly more challenged forts to build a digital technology in-
and how that develops going forward, frastructure platform in India over
once covid-19 is behind us, is a ques- four years ago, and earlier this year it
tion that everyone is asking. But new, decided to sell around a third of the
entirely online forms of retail, like Chi- company in an effort to deleverage its
na’s social commerce, are starting to balance sheet. Besides L Catterton,
take off and are now spreading globally. the business has sold stakes to Face-
China is arguably more advanced than book, Google, Silver Lake, Vista Eq-
the West in direct-to-consumer and so- uity Partners, General Atlantic, KKR,
cial consumer marketing, with the Chi- Mubadala, Abu Dhabi Investment Au-
nese version of TikTok several years thority, and TPG, among other similar
ahead of the international version, for notable investors.
example. In such channels, there are We decided to get involved midway
influencers who wear branded products through this process, although Reli-
that you can click on and buy imme- ance decidedly did not need our capital.
diately, closing the loop of that e-com- But after discussions with the compa-
merce experience on your phone. ny’s senior team, they invited us to par-
ticipate given our experience in build-
Chinta Bhagat: To round off where ing digitally native consumer brands.
we see opportunities, we have also been Our experience with companies like
looking at what happens to traditional connected fitness company Peloton
business models, as well as out of favour and online used car retailer Vroom
“Entirely online forms
sectors, asking whether there are coun- were important proof points, and the
ter-cyclical opportunities. Earlier in company wanted first-hand access to of retail, like China’s
the year, our firm made an investment this expertise. Jio Platforms has made
in Norwegian Cruise Lines, for exam- over a dozen acquisitions in different social commerce, are
ple, and our thesis has held up well. online consumer verticals and it now
We regularly come across traditional needs to scale each vertical and make starting to take off
consumer businesses under temporary them individually successful. Given our
pressures, or with challenged balance experience here, we believe we can be and are now spreading
sheets and ask ourselves if any of these very helpful.
businesses are worth investing behind. Jio is a great example of the evolu-
globally”
Conversely, if some of the trends occur- tion of retail where technology is im-
ring now under covid-19 become more pacting which brands will win. We’re SCOTT CHEN
structural and permanent, then there very happy with our involvement there
may be entire categories that come into and consider it a great addition to our
question. We are studying these closely portfolio during covid-19.
to assess when and how we might step Another relatively recent addition to
in with an investment. our portfolio is Owndays, an innovative
eyewear company that delivers afforda-
Q What opportunities are
emerging for investing in
consumer brands in the region
ble, high-quality prescription glasses
in around 20 minutes. It is an essential
service, with all the elements of a 21st
because of these shifts? century branded consumer product.
CB: Let me answer that by telling you Globally, our firm has similar invest-
about two of our recent investments, ments in this category. Owndays is a
18 Private Equity International • December 2020/January 2021Analysis
Q How has the pandemic impacted opportunities for
brand globalisation out of Asia?
CB: When we think about global consumption trends, we see three major Q How has investor appetite
for consumer brands in
themes: regionalisation; globalisation involving Western brands coming Asia changed in 2020, and
to Asia; and globalisation involving Asian brands going out of Asia. The what is the fundraising outlook
latter is indeed slower, but most of our focus remains on domestic brands going forward?
targeting domestic consumption, so much of our portfolio is China for SC: We are seeing the shoots of eco-
China, India for India, and so on. Where we have an opportunity to nomic recovery across Asia, with
help create regional and then global leaders, we do take it, after carefully Asia-Pacific deal numbers tracking
assessing what it will take to make this a reality. consistently. There were more deals
in Asia-Pacific since April than in ei-
SC: The globalisation trend for brands is indeed a little bit slower now in ther the US or EMEA; that is not sur-
terms of Asian brands going outbound. However, we are seeing very strong prising given where those economies
regionalisation of brands, such as how portfolio company Owndays has are but it has never happened before
expanded from Japan across Asia and then into China. in the history of doing deals. Since
Given the relatively rapid recovery of the Chinese market, we are also April, China deals have also grown to
currently helping four of our global portfolio companies enter China, be about half the total for Asia-Pacific,
ranging from apparel to cosmetics to restaurants. The opportunity in China illustrating the power of the Chinese
is large and our team has built the capability to help these companies. Every economy, which accounted for around
category, every channel and every brand are different, but we are trying 40 percent of the total six months
to set up a playbook to speed that process up from months to weeks. That pre-covid.
means that despite all the challenges impacting their businesses at home, Furthermore, since April, deals in
Western and Asian companies can grow in China. the region are up in size by about 11
percent, suggesting that it is not just
small companies looking to raise cap-
ital but larger businesses too. Almost a
Japanese brand that has now traversed SC: Three countries make up about third of that deal volume is going into
most of Asia with today over 250 stores two-thirds of Asia’s consumer GDP – consumer tech. That is an interesting
in 11 countries. L Catterton has a con- Japan, China and India – and, not sur- development, because in the last few
trolling stake in the business. prisingly, they are our primary markets. years it was fintech and healthcare that
We will, on the other hand, maintain were leading the way, and now it is all
Q Which sectors and
geographies are most
interesting you in the region?
our opportunistic posture in South-East
Asia, Korea, Australia and New Zealand.
We see consumption growth in Asia
about consumer tech.
CB: To build on that, while we are well
CB: We are a pan-Asia focused con- divided into three stages of evolution. set up to cover the region across all of
sumer fund that covers all the major First, unit growth, where the massive these categories, we are focused on de-
economies in Asia. When we look at growth in the middle class generates livering the best risk-adjusted returns
GDP globally, two of the top three more spending by those who can af- on our capital. Our investors believe
economies are in Asia – China and Ja- ford it, as exemplified and led by India. our team and the Asia funds are unique-
pan, as well as two of the fastest-grow- The second is spending growth, where ly positioned to take advantage of con-
ing economies – India and Indonesia. people are just spending more money sumer tailwinds in both current and
There is a lot of consumer activity in per capita, as seen in China and Korea. emerging categories across the region.
the region supported by very strong The third is wealthy lifestyle growth, We have mentioned a number of them,
demand tailwinds. In India, for exam- as we see in Japan, where there is the including consumer healthcare and
ple, the middle class is forecast to grow emergence of the lifestyle-orientated technology or, more specifically, Chi-
by 500 million people in the next 10 consumer and brands. That consumer nese social commerce, among others.
years. So we’re spoilt for choice when is not necessarily only buying luxury With strong teams across offices in
it comes to opportunity, and what we products, but they are improving their Tokyo, Shanghai, Hong Kong, Bei-
do is prioritise the most attractive in- lifestyle on a daily basis. While geogra- jing, Mumbai, Singapore and Sydney,
vestments in consumer categories of phies are important, so too are the cat- we are very excited about the oppor-
interest across these countries, which egories we are investing behind and the tunities in the consumer sector across
offer the most compelling risk/return. stage of consumer evolution. the region. n
December 2020/January 2021 • Perspectives 19Analysis
LPs remain bullish on
private equity
Appetite for the asset class is going strong, despite a concerning combination of high
valuations and a faltering economic environment, writes Amy Carroll
T
he overwhelming ma- Investors in the asset class remain medium term and remain a highly at-
jority of LPs expect to confident about its ability to navigate tractive asset class.”
maintain or increase a turbulent short-term future – 39 per- Merrick McKay, head of European
their exposure to private cent believe their portfolios will exceed private equity at Aberdeen Standard
equity over the next 12 benchmarks in the next 12 months. Investments, is also positive. “Private
months, despite global Only 16 percent fear the worst. Mean- equity firms today are far removed
shockwaves from the pandemic, ac- while, 72 percent of LPs are either from the passive backers of good man-
cording to Private Equity International’s confident or very confident that pri- agement teams they were in the distant
LP Perspectives 2021 Study. Indeed, 45 vate equity deals have been structured past,” he says. “Today, the private eq-
percent plan to pump more money into sensibly enough to withstand the uity model is ideally suited to driving
the asset class. downturn. business growth in benign environ-
This bullishness reflects solid per- “Perhaps the most striking feature ments, but also to making the changes
formance. More than two-thirds of of private equity’s handling of the covid that need to be made when the going
investors found their private equity in- downturn, compared to previous eco- gets tough.”
vestments have met or exceeded bench- nomic crises since 1990, has been the
marks in the last 12 months. However, speed and hands-on approach adopted Favoured strategies
returns have fallen short for more than by GPs to position portfolio companies Buyout, growth capital and distressed
one in five LPs, up from 8 percent a year for a sustained downturn,” says Peter strategies are deemed the most at-
ago. The proportion of investors to have Linthwaite, head of private equity at tractive segments right now. LP ap-
experienced outperformance has also Royal London Asset Management. petite varies significantly, however, by
declined from 47 percent to 34 percent. “The drive for liquidity; renegotiat- region. While over 30 percent of in-
In a protracted low interest rate ing banking facilities; taking advantage vestors expect to boost their exposure
environment with limited alternatives of government packages and rapidly to Asia-Pacific, Western Europe and
for alpha, however, appetite for pri- repositioning strategic plans, have all North America, interest in emerging
vate equity remains voracious. The fact contributed to maintaining the integri- and frontier markets has slumped.
36 percent of LPs find themselves un- ty and sustainability of portfolio com- LPs are watching closely to see how
derweight to private equity will only panies. Overall, I believe private equity GPs pivot their investment strategies to
exacerbate this trend. will continue to generate alpha over the respond to the current situation. While
20 Private Equity International • December 2020/January 2021Analysis
How has private equity performed against its benchmark over the past 12 months? (%) How confident are you that your GPs’ deals
have been structured sensibly enough to
100 withstand the downturn? (%)
100
80
Not applicable
60 Fell below
benchmark 90
Met benchmark
40 Exceeded
benchmark
80
20
0
2019 2020 2021
70
How do you feel private equity will perform against benchmarks in the next 12 months? (%)
100 60
Somewhat not
80 confident
Not applicable Neutral
50
Will fall below Somewhat
60 confident
benchmark
Will meet Very confident
benchmark
40
Will exceed 40
benchmark
20
30
0
2019 2020 2021
half of investors believe their manag- patchy and perhaps the greatest weak- 20
ers are remaining disciplined and are ness in making the case for private
sticking to their investment thesis, 47 equity in any asset allocation decision
percent have experienced occasional is the lack of regularly produced and
examples of style drift. consistent PME [public market equiv-
There are also some investors – al- alent],” says Linthwaite. 10
beit a minority – that still believe they “The covid crisis has highlighted
do not have sufficient information with the weakness of current valuation and
which to assess performance. reporting practices at times of market
“There is no question that inves- turbulence. At a very minimum, quar-
0
tor reporting on performance has terly valuations should be required,
improved significantly in the past 10 reversing the trend towards semi-an- Source: Private Equity International’s LP
years. But comparative data remains nual valuations. The issue of the lag of Perspectives 2021 Study
December 2020/January 2021 • Perspectives 21Analysis
How much capital do you plan to invest What is your current allocation position for
7.3%
in private equity in the next 12 months private equity? (%)
compared with the previous 12? (%)
100 100
Percentage by which investors
anticipate the share of their portfolio
dedicated to alternatives 90 90
will increase, on average,
in five years’ time
two months-plus between quarter ends 80 80
and the production of GP reports also
needs addressing.”
Of course, the macro environment
is presenting plenty of cause for con-
cern. While the US/China trade war 70 70
may have slipped down the list of
challenges keeping investors awake at
night – from 61 percent last year to
33 percent this year – unsurprisingly,
the covid-19 outbreak and anticipated 60 60
recession in core markets have many
LPs rattled. Interestingly, however, as Do not invest Do not invest
we teeter on the brink economically,
Invest less Under-allocated
extreme market valuations are also per-
50 Keep investment 50 At target
ceived as among the biggest risks facing amount the same allocation
the asset class. Invest more Over-allocated
“Valuations would be my biggest
concern,” says Paul Newsome, a part-
ner and head of investment solutions in 40 40
Unigestion’s private equity team. “Pri-
vate equity can invest in sectors that
will grow irrespective of covid. The
problem is everyone will have the same
idea and will end up chasing the same 30 30
companies.”
“There is a lot of pent up demand
and so we have been expecting private
equity returns to slip from their heady
heights for some time,” adds McKay. 20 20
“Everything suggests they should con-
tinue to significantly outperform the
public markets but the sheer amount
of money out there in what may be a
10 10
moribund economic climate could lead
to a dip in performance.”
Others, meanwhile, believe the in-
dustry is at a critical juncture when it
comes to maintaining its fragile repu- 0 0
tation. “My main concern is that a few
failed private equity-owned businesses Source: Private Equity International’s LP Perspectives 2021 Study
22 Private Equity International • December 2020/January 2021Analysis
Regarding private equity, how do you plan to invest in the following strategies in the next 12 months compared with the previous 12? (%)
0 20 40 60 80 100
Buyout
Do not invest
Invest less
Growth capital capital
Invest the same
amount of
capital
Invest more
Distressed capital
Fund of funds
How will your interest in the following regions change over the next 12 months? (%)
Greater interest Similar interest Less interest
0 10 20 30 40 50 60 70 80 90 100
Asia-Pacific
Western Europe
North America
Central/Eastern
Europe
Latin America
Middle East
Sub-Saharan Africa
North Africa
December 2020/January 2021 • Perspectives 23Analysis
Which of the following best describes your assessment of GP investment behaviour in the last 12 To what extent do you agree that you have
months? (%) sufficient information from GPs to assess
the performance of your private markets
investments? (%)
100
100
Other
80 I see
widespread 90
examples of
‘style drift’
60 among my GPs
GPs are 80
remaining
disciplined and
40 sticking to their
investment
thesis 70
20 I see occasional
examples of
‘style drift’
among my GPs 60
Strongly
0 disagree
2019 2020 2021
Somewhat
50 disagree
Thinking of your private markets portfolio, which three factors will have the greatest impact on Neither agree
performance over the next 12 months? (%) nor disagree
40 Somewhat
0 20 40 60 80 100 agree
Strongly agree
Recession in core markets
30
Covid-19 outbreak
20
Extreme market
valuations
10
US/China trade war
Availability of leverage 0
in alternative investment
markets
Social unrest will stir up a wave of public dismay and
thereby bring the threat of increased
regulation as well as general negative
Cybersecurity threat sentiment towards the asset class,” says
Mikael Huldt, head of alternative in-
Impact of the UK’s exit vestments at AFA Insurance.
from the European Union “My hope is that with the current
pandemic and following economic
Threat of higher inflation challenges, the private equity industry
can prove to everyone that responsible,
active ownership and asset manage-
Natural disasters ment will be an essential part of the
economic recovery as well as sustain-
able innovation and economic growth
Source: Private Equity International’s LP Perspectives 2021 Study going forward.” n
24 Private Equity International • December 2020/January 2021You can also read
