Fund Finance Insight

Shelter from the storm
the way ahead for funds

5 minute read time

RBS International’s Head of Institutional Banking in London, Neil Walker, and Head of Institutional Banking in Luxembourg, Ian Harcourt, discuss how lessons from the pandemic can offer real hope as we enter 2021.

Highlights

  • During a turbulent 2020 the funds industry’s safeguards have largely held strong, and fundraising is on course to match last year’s total
  • But the true impact of the crisis has yet to be fully felt, and a slowdown in some areas is inevitable for 2021
  • The drive towards greater transparency, improved governance and greater ESG disclosure is expected to gather pace, as new EU measures come into force.

As the end of 2020 draws nearer, it’s fitting that we take some time to look back on a year that may yet prove pivotal not just in the funds industry, but in the wider economic, social and environmental spheres for generations to come. How we as an industry react to these trends will also have a significant impact in 2021.

The coronavirus pandemic has forced everyone to face some serious, fundamental questions: did we have the necessary resources to address not just a global health crisis but also the wider economic shock that followed? Did the valuation of assets under management accurately reflect the strengths and weaknesses of the investment strategies? Could the funds industry rise to the challenge of confronting a genuine ‘black swan’ event?

And, more specifically, would the lockdown allow fundraising to continue? Would investors default on commitments? Would there be widespread portfolio valuation write-downs?

Taking stock of successes

A few months on, and despite the undoubted challenges that remain, there are reasons to feel both reassured in the present and optimistic for the future. Because if 2020 demonstrated one thing, it was that the safeguards that we rely on in times of crisis have, broadly speaking, held strong.

Even as the crisis first hit, it was encouraging to see many of the larger fund managers making material calls to demonstrate to their stakeholders that their model was resilient and robust, and that they retained control amid wider uncertainty.

And while the subscription market hasn’t been entirely immune to shocks – with some lenders retreating or reducing exposure or limits – on the whole, as a credit profile, it has remained very positive. From a fundraising perspective, Europe’s total for 2020 remains on track to match last year’s €95bn (£85bn), according to Preqin, with limited partners being encouraged to commit additional capital on the back of some successful high-profile deals by the likes of Hg (Visma) and Bridgepoint (Rovensa and Miya), for example. 

Trends for 2021

Now, as the dust settles, we can discern some key trends. First, the true impact of the crisis is still yet to fully play out, with a slowdown in some areas is inevitable for 2021, as government support schemes taper off and payment holidays and deferrals end. There are reasons for optimism, however: positive developments in the race for a vaccine have coincided with an expected return of stability on the US political scene to create a rebound in public markets.

As an industry we are obliged to identify underperforming assets, so we can expect that to be a feature in the coming months. Crucially in that process, though, asset managers must demonstrate an awareness of their role in the broader economic picture, taking into account the very real stresses faced by company managers, employees and the public. In a time when we have seen a genuine pulling together of government, investors, employees and the public, whatever difficult course asset managers decide to take, they must do it in a careful and purposeful way.

Indeed, this offers a great opportunity to look again at the underlying drivers of value, and how we use investment to create long-term value.

Investing with purpose

It is hard to escape the sense that this crisis offers the chance for a genuine reset in how we run our societies and how investment strategies will underpin that change. And of course, the drive for greater transparency, improved governance and more disclosure around sustainability and environmental, social and governance (ESG) will also gather pace. Next year may well prove to be pivotal as investment strategies adapt in the light of a genuine shock to the system.

And, make no mistake, ESG is a fast-growing part of the global investment landscape, and represents significant opportunity. But it is also a necessity, and the new European requirements on measuring and quantifying ESG performance are only the beginning, with further regulatory activity at the sectoral, national and international levels to follow in the next few years.

Next year may well prove to be pivotal as investment strategies adapt in the light of a genuine shock to the system

And we’re responding to that here. As part of the investment in automating our depositary services business, we are developing a scorecard of each fund’s ESG credentials and performance.

Whether that’s being used by fund managers to benchmark themselves, or by investors looking to get valuable insight into whether funds are aligned with their own values, we believe it marks another important step towards mainstreaming ESG measurement and reporting. That has to be central to asset management’s own sense of purpose.

Road to recovery

In keeping with that, we believe the funds industry can play a central role in the reconstruction of post-pandemic global economies.

Encouragingly, the capacity is there: Preqin recently estimated that the funds industry had a record level of dry powder available going into the crisis. With €550bn currently spread across European alternative funds, it’s clear the necessary capital needed to support investment to fund the post-pandemic recovery is there.

This investment will likely focus in several key areas: technology (including broadband infrastructure, digitisation and connectivity), healthcare (in the form of hospitals, vaccines and PPE), as well as logistics and industrial assets.

Much of this will be made possible by the ability of private debt markets to service the debt appetite of the alternative space, which we hope will soften the landing next year. As part of that, we’re likely to see a continuation of preferred equity investors stepping up and filling any gaps left where other debt may not be available.

Finally, it’s fair to assume that the pandemic will drive real change in the fundraising space. We expect the rise of the mega funds – those with over €5bn – to become even more pronounced. So just as there will likely be a flight to quality in assets, so too will there be a flight to quality in asset managers.

Picking winners

This pandemic has produced an asymmetric shock, and we may see a downturn in one space leading to growth in another. The businesses and asset managers that can successfully adapt to those changes can look ahead with the most confidence.

However, as we move into 2021, some activity will remain subdued, leading to lower distributions. That will largely occur as a result of fewer exits and a deferral of dividend recapitalisations. Meanwhile, we may well also see a change in behaviour from those looking to buy assets, as they delay investment to take account of the true scale of the pandemic. As a result, we may see fewer disposals in the short term as buyers take a similarly cautious approach.

Looking further ahead, funds being closed in 2020 and 2021 may well prove to be the best-performing vintages in years to come. Indeed, we’re already seeing signs that investors are recognising this and are committing to fund.

Meanwhile, we can expect the secondaries market to pick up some of the most affected portfolios at a discount. As the true impact of the crisis is revealed, and valuations feed through, there are likely to be numerous institutional investors looking to reduce or adjust their exposure.

Ultimately, just as 2020 has tested the funds industry, 2021 will no doubt offer more of the same. But if we can bring to bear similar levels of flexibility, ingenuity, sensitivity and commitment to long-term value creation, then there are reasons to be cheerful yet.

By Neil Walker and Ian Harcourt

RBS International's Head of Institutional Banking in London and Head of Institutional Banking in Luxembourg