Intertrust Group's chief commercial officer, Ian Lynch, talks us through the firm's global survey of private equity managers, which signposts what a post-Covid industry might look like.

In early spring, just as the world was driven into lockdown by the Covid-19 pandemic, Intertrust Group launched a survey of private equity managers to gauge market sentiment. The timing was fortuitous. As the industry entered into an unprecedented period of uncertainty, around 150 managers responded, eager, like everyone, to get a steer on how the crisis would impact their industry. Looking to the immediate future, managers are broadly pessimistic. About 70 percent of respondents anticipate that the investment outlook will deteriorate or deteriorate significantly in the next 12 months. We asked Intertrust Group chief commercial officer Ian Lynch what else the poll tells us about how GPs are feeling and the world they expect to see after coronavirus.

Did any survey responses surprise you?

Yes, how many people thought the investment market would improve over the next 12 months: around 30 percent. I imagine those managers are looking at falling asset valuations and the amount of dry powder they have piled up and expect to see an increase in investment activity. However, negative sentiment is absolutely overriding. Financing markets are effectively closed and that will impact private equity transaction volumes. Across every sector, GPs are going to face challenges within their existing portfolios and will have to inject cash to ensure businesses survive and then thrive when the lockdown ends. We forget sometimes that managers have a host of existing businesses they will always prioritise over new investments.

Is it all bad news?

Not at all. The beauty of private equity is that investing in closed-end funds mitigates volatility. For GPs, time is on their side and they can manage their assets through the crisis. Operational excellence has always been core for a lot of buyout firms. In a difficult financing market, it will only become more so as the financial engineering piece isn't going to be as easy to execute. Improving margins organically through, for example, technology efficiencies, will be key to sustaining management team and asset performance.

We're seeing several large private equity clients looking at new investment opportunities in countries that are starting to recover post COVID-19. For example, an increase of investment activity in China as its financial sector has rapidly opened back up to foreign capital.

About three quarters of managers expect to see an increase in fund term extensions in light of the current situation. Is this already happening?

We're not seeing it yet. But it makes sense. Managers, like everyone else, will take a pause as they wait for the global economy to reboot. If I'm a manager in

the last year of my fund, this is an awkward time to divest assets. I could try to fold those assets into a new fund, or, extend my current vehicle to extract most value. The latter is in the interests of LPs too.

Are GPs shifting strategy?

The biggest area of diversification will be into private debt - around a third of respondents are planning to move into direct lending. And almost all respondents - 92 percent - believe there will be an increase in distressed fund transactions over the next 12-24 months. It's a good time for those managers. The largest direct lending firms with distressed situation capabilities will be well placed to capitalise on these conditions. A lot of those managers have the benefit of having survived the global financial crisis and offer in-house expertise. Others will be raising new capital in anticipation of upcoming opportunities.

Managers clearly identify digitisation as a huge opportunity. How is this evolving?

Portfolio companies have witnessed huge digitisation gains over recent years, whether that's, for instance, the growth of online booking through travel portals, or, in financial services businesses, the automation of underlying processes to improve the client experience. By sector, digitisation effects are different, but it's a theme any investor looks for – what can digitisation add to a business, what's the GP's plan, and how does it impact top and bottom lines? It's linked to operational efficiency.

And, for you as a service provider, what advantages does digitisation bring?

Particularly now, the demand for virtual board meetings and digital signatures is huge and accelerating the digitisation of our business. Historically, corporate services has been a paper-driven industry, but more of our private equity clients are seeking access to digital information. We use a process automation platform to supply that. Instead of sorting through lots of pieces of paper, managers can use the portal to view all documents relating to underlying entities, corporations, director resolutions, and so on.

From a fund accounting and portfolio management perspective, GPs are collecting much more information from their investments and sharing a portion of it with their LPs. The quality of that portfolio company data is significant as good data allows managers to quickly identify risks and exposures. In future, managers will insist data is provided in a certain format. Data aggregation is a theme. We're investing a huge amount of resources into this area and through our client portal IRIS, we aim to ensure our GP clients have good visibility over their entire portfolio. The last six to eight weeks has proved its usefulness.

Another impact of the lockdown we've seen as a service provider is an increase in client questions regarding team oversight. The use of online business activity monitoring tools will only increase. It's a huge area of opportunity for us. For our clients, it's important we expose our operating procedures, so they know where

we are in any given process. We use a programme called Promo across multiple functions to display to clients where we are with, for instance, bank account reconciliations or quarterly NAVs. Internally, our business employs thousands of people worldwide working remotely and we want to know how they're coordinating and progressing and they're following policies and procedures.

Private equity has traditionally been a very face-to-face industry. How are you seeing that change during this pandemic?

The first major task was to transition to operating remotely. That has been achieved very successfully and now we've entered the "business as usual" phase in which people will need to get used to making decisions from their living room. Virtual meetings have been phenomenally effective, more so than many people expected. After lockdown, there will be much more virtual engagement, for instance during due diligence, with face-to-face meetings perhaps only at the beginning and end of the process. If not, we won't be able to get through the workload. Air travel will be more complicated and the ability and willingness of people to travel will reduce. The new normal will be to communicate and share documents over online collaboration tools such as Cisco Webex or Microsoft Teams.

The implementation of environmental, social and governance policies was already high on the industry agenda. What will it look like post-Covid?

Over the past several years, climate change has become a critical portfolio issue for LPs, particularly in Europe. Coming out of this crisis, there will be a green theme contributing to the economic recovery. I think we'll see the standardisation of ESG criteria, and also reporting, which currently is fragmented across multiple templates. This crisis is only going to accelerate that trend.

First published in PEI publication:  Fund Administration Supplement, June 2020.

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