What we learned at the Private Capital Symposium 2024

London remains critical as a centre for private capital investment, despite the uncertainties ahead

London is still one of the best cities in the world as a centre for family office investment, although there is not a consensus on the long-term repercussions of Brexit or the likely effects of a phase-out of “res non-dom” tax status for globally mobile individuals coming to London.

The first panel of the day was moderated by Simon Ward, a partner at the London law firm Farrer & Co, which sponsored the Symposium this year. Simon led a lively discussion of the British capital’s attractions, looking at both its liveability and its professional services infrastructure.

CGE Partners general counsel Hiroko Atherton, Waymade Capital executive director Rishi Patel and Susanne Pöttinger, investment manager at Pöttinger One World, praised the quality of London’s schools and universities and the intellectual capital that it brings. They pointed to the softer elements that make the city attractive for families. The cost of living did attract some negative attention for those considering moving to the capital for the first time.

But the real attraction for investors was the quality of the city’s financial and legal services and the individuals that work here. In any transaction or investment, the panel heard, you are only as good as the team you have hired and the external advice that is available. Susanne, whose family is still based in Austria, but is looking to expand internationally, liked the network of London Business School alumni she could tap into, as well as the English language and London’s global connectivity.

Rishi’s family office is located near London. That allowed access to the financial services and the M&A advice that was needed, as well as the network to source deals in asset classes such as real estate. However, the Netherlands is playing an increasing role for operational reasons in the pharmaceutical and life sciences industry, after the European Medicines Agency moved from London to Amsterdam post-Brexit.

The discussion took place just one day before Prime Minister Rishi Sunak’s surprise announcement that he was bringing the UK general election forward to July, but the panellists were already wary of predicting what further tax and regulatory changes lay ahead. They observed that some family offices may move to, or look to set up a presence in, Dublin, Amsterdam or Luxembourg to access the wider European market. But for now, they will be keeping a watching brief.

No trade-off between sustainability and attractive returns in private equity. The two are mutually reinforcing. 

Per Franzen, head of Private Capital for Europe and North America at the private equity firm EQT, has been working on sustainability in investments for 30 years, long before it was the hot topic it is today. He told Professor Florin Vasvari, Academic Director at the London Business School Institute of Entrepreneurship and Private Capital, that this focus has taught him that – based on EQTs thematic investment approach - there is “no trade-off between having a positive, ambitious sustainability strategy and producing attractive risk adjusted returns.” This is particularly true in healthcare and technology, the two sectors where EQT focuses its investments.

Per said the same thinking applies to EQT’s portfolio companies in its private equity strategies. The Swedish firm has appointed a sustainability ambassador to 90% of its portfolio company boards. It also has an internal digitalization team of over 30 people and a similar sized team of AI data scientists and engineers who are integrated into the investment organisation and the sector teams, helping to screen investments and “identify repeatable, systematic value creation levers.” If used in the right way, these levers can often also create environmentally friendly solutions. 

Asked whether EQT was seeking to expand its investor base beyond the traditional institutional investors, Per said: "Approximately 10% of the capital that we raised for EQT X came from the private wealth channel, which was a significant increase from previous funds. We think, going forward, that will continue to increase." Asked if EQT provides any liquidity solutions to that sleeve he replied that for the majority of the private wealth channel the terms were the same as for institutional investors.

Democratisation of private equity investments is still a work in progress. Some question whether retail investors should have direct access to private equity at all.

Historically, only institutional investors had access to private capital funds, according to a panel moderated by London Business School adjunct professor Jim Strang. Yet there was a huge pot of private wealth in the hands of “two-legged human beings” that was looking for investment opportunities and which the private capital industry wanted to tap. Today, that pot was reckoned to be worth some $178 trillion – much larger than the $100 trillion or so available through institutional money.

Yet panellists including HarbourVest Partners managing director Simon Jennings, UBS Wealth Management head of Primary & Platform Investments for Private Markets Diana Celotto and KKR managing director Mark Tucker agreed that efforts to open the asset class to even the highest net worth individuals had achieved only limited traction so far.

That is not to say there has been no progress. Some of the largest private banks set up feeder funds in the early 2000s that aggregated client money to invest in private equity and other strategies. Access has been expanded considerably with the relatively recent introduction of open-ended, evergreen vehicles, which are managed by the larger private equity firms rather than the banks.

Evergreen vehicles have helped overcome private investors’ concerns over the lack of liquidity. This has led to increasing, but still relatively low take-up rates. The panel said the market was still a long way from reaching down past family office clients and very high net worth individuals to the so-called “core affluent” and ultimately the real retail client, the man in the street. In large part, they said, the difficult regulatory environment and a lack of an efficient selection process were the main barriers for smaller, individual investors.

But most of all, there was still a mismatch between the liquidity expectations of the core-affluent investor and the ability of funds to meet them. Evergreen funds are not liquid but seek to provide liquidity up to a certain level, (typically 5% per quarter) if the personal circumstances of an investor change. But not everybody would be able to redeem as and when they wanted to.

Simon Jennings said fund providers would have to be honest with their clients before they signed them up.

“These are not trading instruments,” he warned.

The same panellist said that to reach retail investors, asset managers should adopt a “fulfilment-based approach,” rather than selling a product directly. The retail investor should be offered a professionally constructed portfolio, whether provided by a private equity firm directly or through an intermediary such as a private bank, a pension plan or an insurance company.

Private equity portfolio companies have not been more aggressive in using generative AI than independents – at least not yet.

A London Business School study looking at the impact of generative AI on the U.K. competitive landscape might have been expected to show that private equity owned companies, with their focus on growth and efficiency, would be the first to adopt the new technology, using it to improve their operational focus and build new business plans.

That turned out to be wrong. Surprisingly, the study’s lead author, Professor Michael G Jacobides told the symposium, the team had found no “boost” in the expectations of change or in the patterns of use between PE-owned enterprises and their independent peers. Instead, exactly 38% of the companies surveyed in both categories were not using generative AI. Among those that did, it was also clear that the rate both of adoption and of the depth of engagement with the technology depended on the sector – with financial services at or near the bottom of the list – and the level of interest shown by the company’s leaders.

What also varied, both between sectors and between companies within each sector was the depth of engagement – some merely thought of generative AI as a shiny new toy, but didn’t know what they would do with it - and the uses they put the new tool to. Everyone initially saw it as a way to reduce costs. But, beyond that, the most engaged also used it creatively to introduce new products, engage with customers and boost market share. Those that saw the new technology as the most threatening to their industry, the advertising industry for example, were also the most likely to try and do something to make themselves stand out from the crowd. A key to standing out is to know how to leverage the company’s proprietary knowledge and to use the technology’s pattern recognition capabilities to advantage.

The study was supported by Evolution Ltd and was carried out with the collaboration of the Institute of Directors and, in part, with global growth equity firm, General Atlantic .

Michael’s presentation segued into a panel discussion with two representatives of General Atlantic, senior associate Zuzana Manhart and vice president for data science Jesse Thomas, as well as Yuri Romanenkov, academic director of Next Generation Digital Strategy at the London Business School. General Atlantic’s focus on growth capital makes it a particularly apposite partner for the study, as the firm actively partners with its portfolio companies on operational performance and growth.

Jesse said that when assessing opportunities to create value in a company, General Atlantic always looks at the richness and uniqueness of the data the company has, and how that data can be used as a resource to drive growth through data or AI services. In fact, “we’d find it surprising,” he said, “if a technology company we were diligencing didn’t already have an AI feature, or at least one on its roadmap.” He stressed however that AI initiatives are but one vector of potential growth, and that General Atlantic always takes a holistic view, with go-to-market, pricing and M&A moves remaining tried and true vectors also.

In pursuing revenue growth through AI, good things take time and experimentation, and this is where Jesse believes General Atlantic’s cohesive global network and its ability to disseminate learnings across the portfolio will accelerate value capture over time. He concluded, “Capturing value by building a new AI product, or any product, and bringing it to market is still a hard and time-consuming thing to do, and we are only 18 months in on the GenAI journey. It will still take time for the potential of many of the innovations incubating within our portfolio to be fully realised”.

Private credit could eventually become as big as private equity

Mark O’Hare, CEO of the specialist private capital data aggregator, Preqin, said the private credit funds that stepped in to fill the void after the banks reduced their lending had been a great success. Over time, private credit could eventually become as big as private equity. In Europe, in particular, he said, direct lending had grown very rapidly and would likely continue to grow. The majority of private credit was still distributed through private equity sponsored deals, but some was now available to non-sponsored borrowers. Mark gave the example of Preqin’s own 2021 acquisition of the private markets technology, services and administration business, Colmore, which was funded in part with private credit. Yet Preqin remained independent, and the deal was not private equity backed. 

European and US founders really are different

The London Business School’s associate professor of Strategy and Entrepreneurship, Gary Dushnitsky hosted a panel of venture capital GPs, including Saul Klein of Phoenix Court, Target Global’s Yaron Valler and Maren Bannon of January Ventures.

Maren, a London-based native of Palo Alto, noted that startup founders in Europe were often really passionate and engaged, but that the same degree of engagement didn’t always come across with their U.S. counterparts. She said Europeans tended to start by pitching the product and the problem they were solving and only at the end they would talk about their bigger vision. In the U.S. they would start with the big vision and how this would be a multibillion-dollar company - and only then focus on the products.

Saul was in favour of the U.S approach. He said any investor looking for results at scale needed to hear from people with vision. Founders needed to be able “to imagine and articulate the future,” or they just would not get there.

Nevertheless, he described the region within five hours by train from London’s King’s Cross station as the New Palo Alto. Stretching from Glasgow and Edinburgh in the North to Paris and Amsterdam in the South, it was one of the richest and deepest pools of research and development prowess on the planet and was now “the second-best ecosystem globally” for investment in billion-dollar companies. 

NAV Finance’s focus on portfolios avoids exposure to single company risk

Augustin Duhamel, Co-Founder and Managing Partner of net asset value lender, 17Capital, told the story of how he and Co-Founder Pierre-Antoine de Selancy struggled in the early years to raise interest and trust in what was then the novel concept of NAV financing – before becoming mainstream today.

The two Frenchmen had realised that it was much harder for investors to find financing against a portfolio of private assets than for individual companies. So, in 2008, they came to London because “that was the place where it was happening,” and set up their pioneering business providing NAV finance to private equity investors. The timing could have been better. The Global Financial Crisis got them off to a rocky start, but today they have raised over $13 billion and have more than 200 investors worldwide and a team of 100 people in Europe and North America.

17Capital is a specialty private credit manager providing finance against the net asset value of private equity portfolios. It is attractive to investors, according to Augustin, because it generally generates high returns for a level of risk that is comparable to other lower-returning credit strategies. What makes it low risk, he said, and the reason it differs from other strategies, is that the investor is never exposed to single company risk, only to the value of the borrower’s portfolio as a whole. The loans are repaid through the cash flow generated when portfolio companies are sold.

17Capital is now 52% owned by Oaktree Capital Management, (itself majority owned by Canada’s Brookfield Asset Management) but continues to operate independently. It has made over 100 investments and has exited over 50, Augustin said.

The next venture funds will be tokenized

The future of venture democratisation is in tokenization, according to Noor Sweid, Founder and Managing Partner of Global Ventures, a leading venture capital firm investing across the Middle East and Africa. “There is no other way for the mass affluent or the core affluent to access these products,” Noor said, adding that tokenisation would also provide liquidity to a fund’s limited partners and be constantly marked to fair value.

Noor, who was in conversation with associate professor Luisa Alemany, academic director of the Institute of Entrepreneurship and Private Capital, believes that software related to tokenization and blockchain is poised to disrupt legacy industries.

See more information about the Private Capital Symposium and register your interest for the next one here.