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.
