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Like every shock, the coronavirus pandemic will pass. But is the private equity industry ready to help in the aftermath? The recent BVCA conference heard a range of views.
This year may seem to be a year like no other: has there been another one encompassing not only a global pandemic and the attendant economic shock, but also a presidential impeachment (and election), not to mention shifting political landscapes in the UK and beyond?
Disruption and change, of course, are constant themes for private equity and venture capital investors, and many in these sectors will be optimistic. “Times of change and disruption have always offered up opportunities,” said Neil MacDougall, chairman of Silverfleet Capital, at the first virtual annual summit of the British Private Equity & Venture Capital Association (BVCA), of which he is also chair.
As part of a panel looking at how the twin impacts of Brexit and the pandemic will likely shape the broader economic picture, MacDougall was keen to point out that the current crisis did indeed differ in some crucial ways from those that have gone before.
“The key distinction is that this isn’t a financial crisis like 2008, but a global health crisis, so the challenges are different,” he said. “Added to that, we face the imminent change in a political arrangement that has lasted 40 years. So we’re in uncharted territory and the two things are coming together to make it feel like a very challenging time now and in the coming year.”
Thankfully, MacDougall explained, the UK’s private equity industry is well positioned, both to protect its own interests and – perhaps more critically – to provide the capital and expertise to help the nation recover. “The UK has always had the largest PE and VC activity in Europe, and still does,” he said, pointing out that VC in particular had boomed, with the buy-out side performing similarly strongly.
But at a moment when some believe that 10 years of transformation has been forced through in 10 months, what role should PE play?
“Our role remains the same,” MacDougall said. “To invest money and time in making sure that the best ideas prosper, develop and get applied to solve real-world problems.”
And with nearly half of all the money raised in Europe being raised in London, the signs are that the UK’s resilience in the face of twin headwinds remains significant. But there’s no doubt that challenges remain. As the real economy begins what most believe will be a tough few years, PE’s role in it will come under increased scrutiny.
For David Gauke, the former justice secretary and now head of public policy at Macfarlanes law firm, that spotlight won’t go away any time soon. “At a time of economic change and a need for investment, it’s a sector with a huge role to play.”
As a former government minister, Gauke spoke with the authority of someone who has had to make difficult decisions with regard to investment and the fallout that inevitably follows economic downturns. But he pulled no punches in his assessment that many UK businesses might be in for a shock as Brexit looms.
“Many still believe the transition period will be extended, which is highly unlikely; others feel that if the government succeeds in doing a deal it will be a comprehensive one, whereas in reality it’s likely that any deal that will be agreed will be very thin. So it’s a mixed picture, but whatever happens, it will be a seismic change that will require careful handling.”
“Our role remains the same: to invest money and time in making sure that the best ideas prosper, develop and get applied to solve real-world problems”
Neil MacDougall, chair, BVCA
Baroness Jeannie Drake CBE, a former trade unionist and Labour life peer, agreed that private equity would have a critical role in underpinning the UK’s transition to a post-coronavirus (and Brexit) world. “There will need to be a sensitivity about how that transition is handled,” she said, “and it’s a chance for greater openness, because if there is a business model that can help PE navigate the pandemic and Brexit, then the industry as a whole needs to be open about that.
“The industry needs to explain why it benefits society, and not simply focus on talking about investor returns,” she added, suggesting that those in PE would have to share the story on a wider basis to get a more sympathetic response from government and the public. “They need to explain what the ultimate social gain will be, because if you don’t then there will be criticism, especially given some of the sectors – like health, care and retail – which tend to attract more than their share of criticism and attention. So if ever there was a time for a clearer explanation of the industry’s sense of purpose, surely this is it.”
A new set of tools
And that purpose is varied, from spotting innovative ideas to rewarding risk. To truly fulfil their remit, investors must embrace every tool at their disposal to drive future growth. Funnelling the right levels of investment to the right areas has always been central to PE’s mission, and, later in the day, conference attendees heard how fund managers were using a wider variety of financing structures to underpin their future strategies.
For some, that means looking at portfolio finance. Whether that takes the form of preferred equity, net asset value (NAV) facilities or other alternative structures, portfolio financing is now a more mature and developed way of driving investments. “Typically, these types of structures are used to achieve either accelerated liquidity or additional capital to invest in their portfolio,” explained Owen James, investment director at 17Capital.
Disruption brought on by coronavirus has seen some significant growth in the use of preferred equity financing, and for Tom Rotherham-Winqvist, managing director at Wafra Europe, the greater variety of tools available for financing and addressing some of the different needs is a positive. “There is a real diversity of LPs [limited partnerships] and what they want, and that is mirrored on the GP [general partner] side. And that’s all wedged into a pretty homogenous fund structure.”
Indeed, anything that enables the GP to create more value at a decent cost of financing is generally a good thing, he added. However, Rotherham-Winqvist also made the point that PE is a complex asset class as it is. “So, depending on the LP, some of which may not have a lot of human resource, adding complexity is a challenge, because transparency and communication with people who are time poor is an issue,” he said.
Ultimately, the direction of travel for portfolio finance is heading towards greater diversity in a dynamic and disrupted world. “I think we’ve been on an education process for managers in the PE space about the tools that are available, and it will be more common for managers to use these tools if they work for the particular situation,” said Travers Smith partner Katie McMenamin. “As always, the most important aspect will be choosing the right structure to suit the investment.”