January 9, 2019

The Temporary Permissions Regime (‘TPR’) will allow most EEA-domiciled investment funds to continue to be marketed in the UK to new and existing investors for up to three years in the event of a ‘no deal’ Brexit, where there is no implementation period in place so the existing passporting arrangements between the UK and the EEA cease when the UK leaves the EU on 29 March 2019.

Fund managers wishing to continue to market passported funds in the UK after Brexit can now register for temporary permissions. The Financial Conduct Authority (FCA) notification window for the TPR opened on 7 January 2019, and it will remain open until 28 March 2019.

The TPR will allow EU-based firms and funds which currently access the UK market by way of an inbound ‘passport’ to continue to serve their UK customers for up to three years in the event that the UK exits the EU without a formal implementation period in place, giving them time to apply for full FCA authorisation. No reciprocal temporary permissions regime has yet been proposed by the EU for UK firms and funds which currently rely on outbound passports to serve customers in other EU member states.

Fund managers must notify the FCA which of their passported funds they wish to continue marketing temporarily in the UK under the TPR, via Connect. The FCA has published separate guidance to fund managers on how to notify. Notifying Firms will be given a time period, known as a ‘landing slot’ by the FCA, within which they are to submit their application for UK authorisation or variation of permission (“VOP”) to the FCA. The first ‘landing slots’ will be from October to December 2019 and the last will be from January to March 2021. The FCA will inform firms of their ‘landing slots’ after the UK’s exit from the EU. The FCA has launched a dedicated TPR webpage to explain the regime.

For EEA-domiciled investment funds, the FCA has stated that “once the notification window has closed, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions marketing regime for that fund”. It warned that managers will “not be able to continue marketing that fund in the UK on the same basis as they did before exit day” and that “the only exception to this is for new sub-funds of EEA UCITS that are in the temporary permissions marketing regime on exit day”. The FCA stated that it will be possible for such new sub-funds to enter the TPR after exit day. Fund Managers will be obliged to notify the regulator which of the sub-funds they want to enter into the TPR if a fund is divided into sub-funds. The FCA has confirmed there will be no fee for fund managers notifying it of which of their passported funds they wish to continue to market temporarily. Details of investment funds with a temporary permission will also be provided on the FCA Financial Services Register.

If you would like more information on the Temporary Permissions Regime or to discuss how our compliance solutions can assist your firm please contact

PRIVATE EQUITY: A bang or a whimper?

October 30, 2018

Private equity funds have attracted huge numbers for capital-raising this year following a record-breaking 2017. but, asks Mark Latham, can the momentum continue?

A frenzy of buyout deal activity last year saw $290 billion (€246 billion) pour into private equity funds in what was the highest year by value since the previous record year of 2007 in which $249 billion was raised.

Since the global financial crisis, low interest rates and cheap debt, combined more recently with economic recovery and strong performance, have prompted investors to pile capital into private equity funds in search of higher returns.

Rising valuations, however, have made it harder to achieve high returns, so much of the committed capital sits idle as “dry powder” and this war chest of cash yet to be invested now stands at a record $1.14 trillion.

Among the highlights of 2017 was the raising by US-based Apollo Global Management of $24.6 billion for its Apollo Fund 9: a leveraged-buyout fund which at final close in July last year became the largest private equity fund ever – smashing the previous record of $21.7 billion set by Blackstone in 2007.

According to industry data provider Preqin, $290 billion was raised in 305 buyout fund closures last year (of which $109 billion was spent taking public companies private); $73.9 billion of that went into Europe-focused funds and $73.7 billion went into Europe-based funds, with substantial overlap between the last two categories.

Globally, private equity-backed buyout deals in 2017 totalled 4,664, worth a combined $376 billion.

Including venture capital, growth and related fund types, 2017 also saw the largest amount of capital ($453 billion) in overall private equity fundraising in any year.

At the end of 2017 (the latest data available) total AuM for the asset class stood at $3.06 trillion, a rise of $502.6 billion since the end of 2016.

So far this year, $165 billion dollars of capital has poured into private equity funds globally with 142 fund closures and more than 1,000 acquisitions. Of this, Europe-focused funds have attracted $55 billion (41 funds closed) and $56 billion into Europe-based funds (43 funds closed).

In 2018, private equity buyout deals have so far totalled 3,665 deals worth a total of $347 billion.

Although activity slowed in the first half of this year, activity accelerated in the third quarter and, as the fourth quarter of the year is generally the busiest for private equity fund closures, it is still possible that 2018 could match or even overtake 2017’s bumper figures.

The most ambitious fund raising capital currently is the Softbank Vision Fund, which is targeting $100 billion. With backing from two Middle East sovereign funds, it stood at $93 billion at first close in May last year.

The China Structural Reform Fund, a quasi-governmental China-based growth fund which will invest in state-run assets, is targeting $53 billion. Meanwhile, US-based Global Infrastructure Partners 4 and Blackstone 8 are both targeting $20 billion.

This year, the healthcare sector in particular has been a key target for private equity cash. Among the largest deals, in June, was a $9.9 billion buyout by KKR of Envision Healthcare, one of the largest US suppliers of doctors for hospitals.

Another massive deal was Blackstone’s purchase in January of Thomson Reuters’ financial and risk business division for $20 billion in a transaction that was dubbed by one analyst as the fintech deal of the century so far.

Lost ground recovered
Chris Elvin, head of private equity at Preqin, says that the current “unprecedented” period for private equity follows four consecutive years in which more than $350 billion was raised in each year.

“There was a drop-off in fund-raising during the global financial crisis, but the industry has since recovered lost ground,” he says. “There is now an absolute tsunami of cash going back to investors and this has jumped to exponential levels, with more than $400 billion a year being distributed back to limited partners. This trend of limited partner liquidity has driven fund-raising, which is why it has been so stellar for a number of years.”

Elvin says that good performance and strong market conditions leading to rising asset prices have enabled fund managers to sell assets for substantial gains.

“Logic would suggest that if you buy high, you might still create value and generate returns, but are you going to be able to generate the level of returns that has historically been seen?” he asks.

“Some of the results of our surveys suggest a slight reduction in the level of expectation. The belief is that the sector will continue to deliver outperformance compared to public markets, but will those returns be at the level they have been historically? Probably not.”

Robert Mirsky, the UK managing partner and head of asset management of US-based accountancy practice EisnerAmper, thinks it likely that 2018 will break last year’s record in terms of asset and investor flow into the private equity market.

“Returns have generally been good and the large private equity managers in particular have taken in substantial sums,” he says.

“The main factors are returns and the search for yield in a low interest rate environment. Investors are looking for ways to make money and private equity is a good way to do it.”

The tech, life sciences and pharma sectors in particular have benefited from private equity in recent years, Mirsky says, but areas such as professional services companies are now increasingly being targeted.

One factor for the growth in private equity, says Mirsky, is the growth and increasing wealth of the middle classes in Asia, Africa and elsewhere looking for better returns on investments than those offered by mutual funds.

In addition, he says, new products have come to market in recent years that allow regulatory-defined sophisticated investors, who were not previously able to invest into alternative strategies, to invest in hedge or private equity-like strategies as part of the normal portfolios.

“While they technically may still be in a mutual fund, those mutual funds are now invested into private equity-type products,” he says.

Mirsky points to the fact that five to ten years ago, average returns on private equity were higher than they are today.

“In the short to medium term, you are going to continue to see significant asset flows into private equity but longer-term, I wonder what happens when what was alternative is now mainstream and everybody is invested in that.”

The same point is taken up by Ian Kelly, chief executive of fund administration firm Augentius, who believes that as the asset class becomes more mainstream, this will create more risk.

“Private equity must not only deliver the returns expected but also provide the levels of transparency required by its ‘new’ investors, which is not something currently achieved by all private equity firms,” he says. “Private equity has matured substantially over the last decade. As an industry, it has helped investors to understand the complexities of the asset class and the mechanics of the investment cycle.

“Consequently, not only have the number of investors in the asset class increased, but allocations to the sector have also increased. Many investors no longer see private equity as an ‘alternative’ asset class – but a core component of their overall portfolio.”

Meanwhile, Joe Docker, a director at the Alpha FMC consultancy, says that private equity returns have benefited from the continued bull market over recent years, driven in particular by access to strategies unavailable to traditional managers, high exit multiples and able buyers.

He adds that outperformance against other asset classes has continued to draw limited partners’ capital in record numbers and remains attractive to pensions managers looking to close their asset-liability gaps. “General partners however, left with ample cash – including record amounts of dry powder in the form of unutilised funds – are facing various challenges,” he says.

“These include the high-multiple environment, increased competition from both managers looking to put capital to work and corporates seeking inorganic growth, as well as an uncertain economic outlook and predictions of a slowing economy post-2019.”

Michael Johnson, head of funds for the Channel Islands of the corporate management company Intertrust, believes that a continuation of the current period of low interest rates means that momentum into private equity is likely to continue.

“Interest rates are beginning to creep up and asset price bubbles are beginning to emerge. Simultaneously, global regulation and tax are becoming increasingly complex and political instability is a troubling and increasing distraction,” he says.

“While there is considerable buoyancy in the current market, these headwinds mean the outlook for the sector could be slightly more precarious than it seems.”

Richard Hickman, director of investment and operations of the London-listed investment firm HVPE, points to the growing popularity of listed private equity fund of funds as a way for investors to access the asset class.

“The whole sector regularly trades on a wide discount to net asset value (NAV), so there is a real opportunity for investors at the moment as the market begins to appreciate the track record of some of these vehicles in delivering consistently strong NAV growth, while offering defensive qualities by virtue of their significantly diversified underlying holdings,” he says.

First Published on Funds Europe, October 2018

The heatwave and the storm: managing investor sentiment in the changing PE market

October 5, 2018

The heatwave that has gripped much of the Northern hemisphere over the summer months provides a neat metaphor for the current state of the global private equity and real estate industry. Just as Europe and North America have sweltered under record temperatures and aridity, ‘very hot and exceedingly dry’ more or less summarises the state of the alternative investment market.

Despite a slight ebb in Q2 of 2018, firms are raising money at a pace and level not seen since before the financial crash. According to Preqin, 2017 saw a massive 20 per cent increase in funds under management, the highest rate of annual growth ever recorded by the analyst, bringing the industry’s total AUM to over three trillion USD. The average fundraising period has now fallen to 12 months, half of what it was in 2010.

This is all quite understandable considering that the industry has frequently posted double-digit returns in a post-crash era marked by a paucity of yield. However it has led to a situation where the flow of money is fairly one-way. The amount of ‘dry powder’ has increased in lockstep with AUM growth, rising 24 per cent in 2017 to a record level of 1.1 trillion USD – with some estimates putting the figure as high as 1.5 trillion. The trend has become self-perpetuating: fund managers have more and more capital, with less and less attractive options for spending it, which only pushes deal values higher, continuing the cycle.

As such, and despite the overall buoyancy of the sector, firms may be about to enter into a tricky phase which will take skill to navigate. Paper gains are all very well and good, but ultimately don’t mean anything until they convert to actual gains via exits. The risk now is that the fierce competition for investment opportunities will inflate deal valuations to the point of seriously impacting returns. And while this might be a short term phase to allow for market rebalancing, investors who are used to outperformance from the sector – or have recently moved into the sector, drawn by the allure of double digit returns – may find such a dip difficult to stomach.

Good investor relations come easily when the returns are flowing, but should there be a period of tightening, trust and confidence will need to be sourced from elsewhere. Communication will be of critical importance. Constant talk of squeezed returns due to overpricing will make it more crucial than ever that managers are able to clearly, regularly and efficiently provide information on portfolios, explaining the situation and their strategy – ensuring that sentiment is managed and that key relationships don’t become a casualty of the changing environment.

In fact, boom times or not, investors have been agitating for greater transparency into their investments for a number of years. The industry has done some good collaborative work to respond to this. Notably, trade body ILPA’s common reporting template is beginning to catch on (a laudable case of being ahead of the regulator, which is consulting on a mandatory fee template of its own). However there is still a way to go, and while standardisation of this sort will certainly improve things, it doesn’t help provide the granular, customisable information of the sort LPs are increasingly hungry for.

And on a firm-by-firm basis, there is still a long way to go. Despite a recent wave of investment in technology, some parts of the industry remain relatively low-tech relative to their peers in finance, with much of this visible in the area of investor communications. Too many firms still rely on outmoded, simplistic updates delivered via PDF or email.

While this may have sufficed in the less heavily regulated, less formal PE industry of old, in the modern environment it means one of two things: damaging relationships, or creating obscene amounts of unnecessary cost and work in the process of responding to ever-more complex and idiosyncratic investor demands (or worse, both). A recent survey of Augentius’ clients across the globe revealed that only half of managers were providing their investors with enough information on a routine basis, without investors having to make additional requests. Concerningly, one in five investors reporting never receiving the additional information they requested – which hardly inspires confidence. And what’s somewhat damaging to relationships now could be fatal during a period of lower returns and investor anxiety.

The barriers to solving the problem are far more cultural than financial or technical. Well-tested and relatively low-cost platforms exist now that can automate much of the reporting process, allowing for far more in-depth, frequent and granular information to be sent to investors. This can be tailored to exactly what investors want and need – without any corresponding increase in cost and effort for fund managers (indeed there is often a net saving given the efficiency gains).

Nonetheless, the gradual pace of change on this front may not be quick enough. Should the long summer of private equity be able to give way to a storm, the need for gold standard investor relationships will become one of survival rather than advantage. Storms have a way of separating the wheat from the chaff.

First Published in Alt Assets, September 4th