Following the success of our London events, we recently hosted our first luncheon with Limited Partners in Copenhagen, which attracted investment professionals from Danish pension funds, funds-of-funds and third-party consultants.
Below are four of the key industry trends we discussed in what was an engaging and informative event.
More first-time funds than ever are seeking capital in Europe, according to Preqin(1). As of January 1 2019, there were 149 such European newcomers looking to raise €106.5 billion, up from 2018’s €104.2 billion target among 104 funds.
So how do LPs feel about committing significant capital to these sometimes unproven GPs? Appetite remains healthy, thanks largely to LPs’ positive experiences with first-time funds and more evidence coming out of the outperformance of first-time funds vs. more established GPs (for example, Preqin’s 2016 report ‘Making the case for first time funds’)(2)
One key challenge for investors, however, is often deal attribution – first-timers are often not allowed to publish full details of deals they worked on at prior funds. A high-quality placement firm can help to navigate this issue, including re-building a track record from publicly available data.
With the trust of existing LPs and a good track record on their side, more GPs are expanding the number of products they offer (for example, PE firms launching credit funds). By diversifying into new products, firms are able to meet investors’ desire to increase allocations to alternatives plus leverage their brand equity. However, there can be issues around potential conflicts of interest. Also, are LPs truly backing the best of breed teams, or allocating to the new strategy because they want access to the GP’s flagship fund?
European tech ecosystem
Europe has come of age when it comes to producing highly successful technology start-ups, with a number of successful IPOs for European tech ‘unicorns’ over the last 18 months. Europe has historically attracted fewer lower- and mid-market tech/growth investors than the US – in part because the opportunity set was far smaller. This relatively attractive opportunity set has not gone unnoticed and capital flows have responded – 2018 was a record year for European venture fundraising(3); with a quarter to go, 2019 has already broken that record according to PitchBook data(4).
Environmental, social and governance (ESG) is one of the biggest trends in the investment industry. The number of investors who have signed the Principles for Responsible Investment (PRI) has grown to over 2,300 from 1,200 in 2013(5), while the Global Impact Investing Network (GIIN) estimates the current size of the global impact investing market at $508 billion, up from $228 billion in 2018(6). Private equity is no exception with many LPs embracing the UN-supported PRI initiative and Sustainable Development Goals.
LPs are increasingly conducting environmental, social and governance (ESG) due diligence alongside their usual assessments before committing to a fund and a lack of understanding or commitment to these issues can prove a deal-breaker. As a result GPs are firming up their ESG policies to offer more disclosure and greater transparency while many are hiring ESG teams.
Private equity investment in European companies hit a record €80.6 billion in 2018, a 7% year-over-year increase, according to data from Invest Europe(7). Investment was up across all private equity segments, including larger buyouts, mid-market investments and growth capital. In this fast-paced environment for European private equity, taking the time to sit down with sophisticated LPs from across the Danish scene and delve into the important issues affecting all investors proved a valuable learning opportunity for everyone involved.