Can private equity have their cake and eat it too?

Can private equity have their cake and eat it too?

Lisa Crotty 21st July 2022 Lisa Crotty, Enterprise Client Director, Delio

The private equity industry has grown tremendously over the past decade. McKinsey estimates that its net asset value has grown by a factor of 10 since 2000, three times more than public markets over the same period. 

One of the most-discussed topics within the space is around the democratisation of private assets. Driven by the demand amongst the mass affluent and retail investors, improved access to the asset class would enable these groups to (potentially) enjoy the attractive returns it has historically yielded.

This trend, and those large private equity firms looking to capitalise on it, sits in stark contrast with the concerns held by many regulators regarding the risks embedded within this behemoth industry. Private markets have historically been the least transparent and least regulated asset class, traditionally reserved for allocations by well diversified institutional investors who could ‘afford to take the risk’. 

Given the way in which the industry is evolving, how do we reconcile the democratisation of the asset class with its inherent risks and nuances, particularly in the tumultuous market environment we currently find ourselves in? 

Here at Delio, we believe there are three important things to consider:

Retain control of investor relationships

Fundraising can be complex. It requires you to consider a number of important factors including how to position your investment strategy and competitive advantage in the eyes of LPs, fund size and fee structures, as well as metrics, reporting and ongoing servicing of investors. Whether you raise funds yourself or lean on a credible placement agent to assist you, the importance of retaining control of this process and having visibility around your investor journey is key. 

Private Equity Wire’s recent Insight Report noted that 20% of LPs felt their trust in their GPs had decreased over the past five years; this provides a stark warning to those neglecting LP relationships. As access to private markets becomes easier and the industry becomes more transparent, LPs will be able to shop around more which means that nurturing these relationships has never been more important.

Retaining control of your fundraising process, as well as how you service investors on an ongoing basis, can feel overwhelming. This is especially the case when you consider it in the context of democratisation, which essentially means having a larger and more diverse investor base to track and service. However, it doesn’t need to be complex. Digitising your fundraising and investor servicing processes, either in full or for select groups of investors, can be an efficient way to bring in new investors without compromising on quality of service, thereby maintaining and growing valuable LP relationships over time.

Robust compliance processes 

Regulatory compliance will be crucial to the success of those looking to fish in the mass affluent pool of investors for their private asset fundraising. Historically, private asset propositions have typically ‘flown under the radar’ from a regulatory perspective. Larger institutions have focussed much of their legal and compliance resources on their public market offering, and smaller private equity players felt a sense of comfort from historically not being central to most regulatory agendas. 

This is set to change however, with less sophisticated investors becoming increasingly able to access alternative asset classes. Naturally, as private markets become of greater mainstream interest, it follows that the regulatory lens will gradually shift in that direction as well.

Getting ahead of the game by levelling up your compliance processes and controls will safeguard you against any unwanted regulatory attention and reputation-tarnishing fines. Digitising some of these compliance processes can be an effective way to do this, particularly around fund distribution and rules relating to investor preferences and suitability. Digitisation also provides the added benefit of information continuity. Where staff turnover can often lead to information being lost or forgotten, digitising compliance controls and workflows ensure a robust audit trail even in the most turbulent of times.  

Set yourself up to scale

Given that the democratisation of private assets is a relatively recent phenomenon and something the industry is still figuring out in terms of what it looks like and how it should work, it can be tempting for some private market players to merely dabble on the side-lines of this opportunity without fully committing. 

We would advise against this approach. As history has shown, it tends to be those that embrace opportunities and help define what the future will look like that will ultimately thrive in it. 

The private equity industry is gearing up for its future which will feature easier access, better connectivity, more liquidity and increased digitisation. It’s high time more industry players equip themselves to ride the wave of private assets democratisation, hereby futureproofing themselves and avoiding a ‘Kodak moment’ and remaining relevant and top of mind for their clients. 

If this is something you want to find out more about, book a demo with our team of experts who’d be more than happy to help.

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