Listen now or read the full briefing below
A regular briefing for the alternative asset management industry.
At the end of last month, we hosted our third annual Alternative Insights Summit in London. Our theme was Politics, Policy, and Private Capital. The agenda for the day can be found here.
As extensively covered in our previous edition, Coller Capital's Co-Head of Investment and Global Head of Origination, Francois Aguerre, delivered the afternoon keynote. Francois' take on the state of the industry was insightful and realistic – and he ended with a characteristically upbeat message.
But the day did not start on such a reassuring note. On the contrary, our first session captivated – and, in some cases, terrified – our clients with a crisis management case study. Travers Smith partners Caroline Edwards and Phil Bartram considered the fictitious but all-too-realistic crisis that hit our make believe (but aptly named) client, Titanic LLP. As our scenario played out, the quick reactions of the client team, and the investigation they commissioned, helped to mitigate the fallout and – we hope – left our audience feeling better equipped to deal with an emergency should it arise.
Our second session of the day was also rather sobering. A panel session chaired by funds partner Tosin Adeyeri concluded that LPs are liquidity constrained and are more selective in the sponsors they back. Unsurprisingly perhaps, their focus is on established houses with strong track records, and those who have demonstrated an ability to navigate difficult times. One panellist argued that realignment of return expectations was needed – but that fundraising will bounce back.
The sobriety continued in our session on legal and regulatory challenges, facilitated by financial services regulatory partners Michael Raymond and Danny Riding. Among the things that keep general counsel awake at night is the ever-growing number of foreign direct investment and national security clearance regimes, which significantly complicate international deals. And, as other regulation mushrooms, it is not only the initial acquisition that is more difficult: due diligence also has to include an assessment of the impact of possible future rule changes on exit options and pricing.
Firms are also making their own lives more difficult by diversifying their investor base. Of course, this is a positive and natural next step for a mature asset class – but sponsors should not under-estimate the additional regulatory burdens that come with a more retail-facing marketing strategy. Even if that only means high net worth investors, the UK's new consumer duty and the EU's emerging retail investment strategy are adding complexity to an already complicated matrix of rules.
Meanwhile, distributor banks feature prominently in this market, and their influence over product design, marketing materials and fund terms may come as a surprise to some newcomers. Understanding the distribution channels, and good relationships with the right people, will be key to those seeking to launch new retailisation strategies.
Will Normand's subsequent panel also stressed the importance of investor education, both to protect investors but also to manage operational and reputational risk. As new products are developed for a wider investor base, all parties in the distribution chain must have a clear understanding of the underlying strategy, structure and terms. In particular, they need to be clear about liquidity management mechanisms, the levers available to the manager, and when these levers may be used. Otherwise, they may have unrealistic expectations about the fund's income and capital return profiles.
Related to diversification is the move to get more UK pension schemes to invest in private capital funds – a move strongly supported by the incoming as well as the outgoing UK government. As David James and Will Normand explained, reforms to the regulation of defined contribution (DC) pensions are welcome – but are only part of the answer. Overcoming the commercial barriers is also key – which is why the BVCA is working hard to foster a constructive dialogue between pension fund investors and venture capital and growth equity fund sponsors.
In an afternoon that focused on opportunities, our panellists' assessment of the ubiquitous continuation vehicle was balanced. Expertly curated by Victoria Bramall, the speakers argued that continuation funds should be used for high quality assets, should be based on a compelling and well-articulated rationale, and should be structured to align LP and GP interests. Price is obviously crucial – and, while disposals are often at or near NAV, some robust market-testing is now common.
But LPs should also assess the total package of terms: the management fee, rollover of carry, new fund term, and the extent of GP co-investment. These matter, in part because – if structured correctly – they can improve alignment. Initial data indicates that continuation vehicles have performed well, which is likely to stimulate demand – and our panel concluded that the structures are not merely a feature of a liquidity constrained environment, but are here to stay.
Tax partner Elena Rowlands then hosted a panel on tax with two very large alternative asset managers, who immediately picked up on an earlier theme: retailisation. Don't forget the tax aspects, they cautioned, reminding the audience that individual investors have a wide range of tax needs. The tax function should work closely with the IR and sales teams to ensure that they do not overpromise, and that investors understand the tax profile of the product.
"... the industry will be "back to work" in the Autumn – although for tax, legal and compliance teams, it doesn't feel like they ever stopped."
The panel also discussed an international tax avoidance measure known as "Pillar Two", which is introducing a global minimum tax rate of 15% for large multinational groups. Although designed with corporates in mind, the changes will affect many fund structures – at house, fund and portfolio company level. Politics was never far from our agenda, and with the election of Donald Trump looking increasingly likely, our panellists speculated on the future for this international initiative – currently supported by the Biden administration – under a Trump presidency.
An internationally competitive carried interest tax regime can support a country's fund management sector. The panel noted that, at the moment at least, the UK is in the middle of the pack. Potential changes to long term capital gains rates in the US should be watched closely – our panellists predicted that they would have an impact on European policymakers. The industry needs to double down on its message that asset management in general – and private capital in particular – is a partner for growth and productivity, and should be nurtured. There is evidence that this message is landing, at least in some influential quarters.
Our session on sustainability, led by the head of Travers Smith's Financial Services & Markets Department Tim Lewis and ESG specialist Sarah-Jane Denton, considered strategic opportunities – but also addressed some threats. The polarised views on ESG – and especially the attitude of important US investors – has been leading to some "greenhushing", or at least causing global firms to re-think how they describe their sustainability credentials. At the same time, the climate crisis and other environmental and social issues are high on the agenda for many stakeholders, and that has created many opportunities for the private capital firms who are well-positioned to take advantage. The EU's new rules – although complex and unclear – have helped ESG-conscious investors to demonstrate their commitment, and more firms are embracing SFDR Article 8 and Article 9 categorisations.
Data challenges were also highlighted in this session, including for firms making their first mandatory reports under the TCFD framework. The UK regulator's pragmatic approach in these first few years is welcome, and firms are struggling with Scope 3 emissions data in particular. While it is relatively easy to gather data on business travel and office waste, "financed emissions" is proving more tricky.
But these issues will look trivial alongside the challenges of the EU's Corporate Sustainability Reporting Directive (CSRD), and the advice was: start now! Reporting requirements are being phased in, so the first step is to work out which parts (if any) of your firm and portfolio will be in scope, and when various data points need to be reported. That is not straightforward, in part because the regulation does not respect your organisational boundaries – you will need data from businesses in your "value chain" as well.
At the end of the day, we enjoyed a fascinating discussion on world affairs with Jon Sopel and Lewis Goodall from The News Agents and two former heads of the UK security services, but not before Will Yates and Tom Hartwright led a discussion on M&A.
While there has still been a considerable buzz around some hot assets, the market has been slow and difficult, they argued, causing a number of sale processes to abort. The increased cost of debt, combined with economic and political volatility, have contributed. Deal craft and creativity are called for, with a focus on the sectors – like software – that have been the most active.
But our panellists were positive about the future: AI will improve productivity, the UK looks more attractive than in the recent past, and interest rates and inflation are trending in the right direction. That meant that our final session echoed Francois Aguerre's keynote message: the industry will be "back to work" in the Autumn – although for tax, legal and compliance teams, it doesn't feel like they ever stopped.
Enjoy your summer!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.