2023 was testing for private equity, but it’s shown its resilience. Despite the backdrop of high inflation and interest rates, a slowing global economy and escalating geopolitical tensions, the investment case for the asset class remains compelling. And a deeper, more diverse pool of investors are recognising the role it can play in a diversified portfolio that can help them achieve better risk-adjusted returns.
As we look ahead, we envision a new phase of growth for the industry as economic fundamentals improve. Among the reasons for a more optimistic outlook are companies staying private for longer, the ascent of Artificial Intelligence as a value-creation lever, and the growing availability of structures catering to long-term private markets investments.
With so many moving parts, we will see greater reliance on data and analytics as asset managers look – and need – to provide an accurate picture of the fund universe, engage and guide new investor groups, and in general navigate the ever-more complex private markets landscape with clarity and a competitive edge.
Hear from Charlie, Tom, Tony and Edward on what we’ll be keeping an eye on over the remainder of 2024…
Tech-led Value Creation
As GPs continue to push tech-led value creation opportunities across their portfolio – from data analytics to supply chain optimisation to automation of critical processes, they will start ramping up at fund level what they preach at portfolio level, leveraging advanced technologies to enhance their own productivity and success.
AI in particular will be one to watch, with its ability to seamlessly connect an array of financial and market datasets, then use powerful analytics to quantify risks, glean actionable insights and boost confidence in decision-making. We’re probably at – or even past – peak initial hype and we have yet to see obvious use cases come to the market, but it’s something everyone is exploring for fear of being left behind. Deal origination is one use case that’s attracting a lot of attention, but it’s not been cracked yet.
Partnering with the right AI-enabled platform will ease the operational and regulatory burden, while unlocking growth opportunities across the investment lifecycle, from onboarding to portfolio optimisation and reporting.
Charlie Markham, Chief Technology Officer
Retailisation of Private Markets
Progress to open up private markets to retail investors is well underway, with new structures such as the long-term asset fund (LTAF) in the UK, and the revamped European long-term investment fund (ELTIF) enabling individual investors – especially high-net-worth investors – semi-liquid access to alternative assets, such as private equity, private credit and infrastructure. Preqin projects private capital AUM to reach $18.3 trillion by the end of 2027, almost double the $9.3 trillion as at the end of 2021 – with much of this growth driven by individual investors.
The role of agile digital platforms will be crucial to engaging and educating these new investors around the merits of private markets investing, as well as lightening fund managers’ administrative, operational and technological load of catering to a broadened, more diverse investor base. Add the increased liquidity characteristics of the new fund structures designed for these audiences and managing the investor base will be a very different prospect for private markets firms in the coming years.
Tom Richardson, Head of Product
Consolidation
In a tough fundraising market and maturing industry, GPs are facing intense competition and are having to work even harder to deliver strong returns. As a result, the consolidation route is looking more and more appealing, with its promise of economies of scale, diversification into new lines of business, and access to new talent, technologies and investors.
PE industry M&A activity rose at a steady pace in 2023, with 10 deals worth $2.5 billion taking place, as of September 2023, according to Pitchbook data, and is showing no signs of slowing so far in 2024. In January, for example, we saw General Atlantic acquire sustainable infrastructure firm Actis, creating a $96 billion investment platform.
If this wave of consolidation is to continue, the industry will have copious challenges to overcome, including complexities in the post-merger integration process, keeping competition and innovation alive among a smaller group of mega-managers, and in that vein a possible crackdown by antitrust regulators.
Technology is always one of a common area of friction in that post-merger process, but it can also be part of the solution. An acquisition is often a time when firms look at their technology more holistically and mark a fresh start by introducing new systems to reduce friction, ease consolidation and breakdown siloes to create a single source of truth across the enlarged enterprise.
Tony Poulson, Chief Revenue Officer
A Regulatory Sea Change
The SEC’s sweeping reforms designed to increase transparency and oversight of US private markets came into effect towards the end of last year, while in the UK, the FCA is set to review private market valuations, with a focus on discipline and governance. Greater regulation generally means more investment in technology, and the increasing focus on transparency is no exception. And neither is it just the preserve of the regulators. LPs are increasingly demanding more data, more regularly, more interactively.
Data will play a pivotal role in making sense of the changing world of regulatory and investor reporting over the coming year, helping GPs to stay on top of their new reporting obligations and secure investor trust in a more transparent operating environment.
Edward Moore, Chief Executive Officer
This is an interesting time for private markets, with huge opportunity for those managers that are positioned to capitalise on these new dynamics. At Lantern, we’ll be focusing on further developing our suite of data analytics and technology solutions to empower transformative decision-making and give our clients a competitive edge by providing unrivalled access to the most accurate, high-quality data available.
In particular, we look forward to unveiling an industry first – our natural language search product which will enable GPs to access data in a way that is not available anywhere else in the industry. We will also be launching a new platform that will smooth data transfer, reporting, task sharing and communications between LP and GP, promising to take the LP/GP relationship to a whole new level.