The Positioning of Private Markets Amid the Post-Pandemic Great Recovery

Author

Andrew Poole

Publish Date

Type

Article

Topics

  • Compliance
  • ESG

At this year's Regulatory Horizon 2022: Preparing for the Challenges of Tomorrow conference, we examined key governance, risk and compliance challenges that firms face in 2022, and beyond. A whitepaper has now been developed, capturing key takeaways and benchmarking polls from the event.

This blog features one of the nine chapters in the paper. Click here to view the full paper and access on demand recordings of panel sessions embedded throughout.

Overview

  • Private markets will play a substantial role in the post-Covid-19 economic recovery of the UK
  • Firms should consider ways to future-proof their businesses, and the businesses within their portfolios
  • Regulatory divergence continues to be a significant concern for the private market firms that operate in multiple jurisdictions

The Positioning of Private Markets Amid the Post-Pandemic Great Recovery

The industry has certainly bounced back from the Covid-19 pandemic, with near record-level deal volumes and a string of large, significant transactions. This is contributing to the overall economic recovery in the UK. For example, members of the British Venture Capital Association (BVCA) support more than 5,000 businesses and are responsible for over one million jobs.

More than 90% of the companies receiving private equity or venture capital support in 2020 were small and medium-sized businesses. About £9.5 billion overall was invested in UK businesses by BVCA members in 2020. So, private equity and venture capital is contributing to the recovery from the pandemic for development in private markets, not a contraction.

Event attendees were also confident about the role that private markets would play over the next 2-5 years. Nearly 44% agreed that private markets would make a significant contribution, with expectation of an increase in take private transactions in some form or another. Another 39% said the private markets would be on equal footing as public markets with an increase in M&A in privately-held companies.

How prominent a role do you expect Private Markets (PE, Direct Lending et. al.) to play over the next 2-5 years?

Agile firms are already future-proofing their businesses by embracing digitisation and sustainability, as well as potential geographic diversification. In fact, half of the session attendees say the Great Recovery is a combination of economic recovery with an overlay of environmental factors. Helping the companies they own to tackle these key challenges too can also help to enhance the value of a portfolio.

What is the Great Recovery?

For example, private market firms can have teams with specialist sustainability expertise that can be brought into companies to enable them to transition to a more sustainable footprint, and to develop robust ESG key performance indicators (KPIs). It’s important to take real action in this area – both regulators and investors are becoming increasingly aware of greenwashing.

Regulatory divergence a challenge

The other big challenge facing private market firms is regulatory divergence. For UK-based firms marketing into the EU, the regulatory environment has become more complex post-Brexit, with firms needing to comply with both UK and EU regulations. If firms market into the US, then they also have to consider the burden of that regime’s regulations.

One example of this is the way the EU is broadening out its financial crime fighting approach by re-referencing the EU list of high-risk jurisdictions in amendments to AIFMD, rather than the, previously referenced, Financial Action Task Force’s (FATF’s) list.

It’s possible the EU list will be expanded to cover places currently included in the FATF’s expanded monitoring list like Malta and of course opens up the list to far more political influence than typically seen under the FATF. This would be a significant regulatory divergence from other jurisdictions. Another example of this is the US SEC’s coming cyber risk management regime, which could have a significant impact, and differs from EU and UK regulations in this area.

So, private market firms need to get managing regulatory change right. Half of event attendees indicated that they believed that lack of consistency across jurisdictions would be the major impact on private markets over the next few years.

If firms are able to successfully manage regulatory change, it could be a competitive advantage for them. For example, the need for firms to work from home during the pandemic has also pushed firms to build out more formal business and compliance processes and to scale those processes as they grow. However, the flip side of this is also true – getting this wrong could wind up being a real competitive disadvantage for individual firms, with significant financial and reputational impacts.

What will be the major impact on Private Markets over the next few years?

Download our GRC whitepaper to identify your governance, risk and compliance gaps before the regulator does.

On Demand Webcast

Click here to watch a recording of the panel discussion from which this article has been written.

Questions?

Our specialists are on hand to help you to navigate these challenges while considering the complexity of your firm’s unique compliancemanaged services, and ESG requirements.

In addition, our ESG advisory team are on hand to help you gain clarity on your ESG requirements and build a strong ESG program that meets incoming regulatory needs. This practice helps firms of all sizes develop and monitor ESG programs to mitigate risk, make informed choices, grow profitably and sustainably, and combat greenwashing in the process. 

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