Dewi Habraken, Senior Director, Institutional Capital Services, JTC Group writes that global demand for private market strategies, such as private equity and real estate, remains strong, as the asset class has not only delivered above average historical performance, but is also well-positioned to navigate the current macro and geopolitical headwinds.
According to Preqin, 36 per cent of global investors plan to increase their private equity allocations in the near-term, whilst 27 per cent said the same for real estate. Over the long-term, 46 per cent and 28 per cent of allocators intend to boost their holdings in private equity and real estate respectively.
In 2017 European insurers had only 8 per cent of their portfolios invested in illiquid assets; by 2023, this had increased to 15 per cent. Despite this, European allocators are still under-weight the asset class, and US General Partners have spotted a commercial opportunity. US GPs, particularly mid-cap firms, are looking to complement their US fundraising efforts by widening their sales and marketing campaigns in Europe.
Be prepared and ready to impress!
European LPs may be looking to ramp up their private market exposures, but competition for capital is fierce. In this crowded fundraising environment, US GPs hoping to secure mandates will need to be fully prepared and ready to impress. At the same time, US GPs will need to tailor their marketing and sales campaigns for European audiences – what worked well with US Limited Partnerships may not always strike the right chord with prospects in Europe. Have the right strategy and a track record GPs must identify which investment strategies are landing in Europe.
Among the most obvious differentiators between the US and the EU are fund structures. It’s less common to find Europeans keen directly to participate in US LPs (as above), or LLCs (Limited Liability Companies) often preferring to access US managers through parallel fund vehicles domiciled in Luxembourg or Ireland. These vehicles typically invest alongside the US fund in the same underlying investments.
Differing views of ESG
Another issue which requires consideration is different attitudes towards ESG. In the US, opinions, indeed investment strategies, are sharply divided over the importance of ESG. To quote a paper published earlier this year by the Harvard Law School Forum on Corporate Governance:
“At its core, the current US ESG environment reflects two competing views. One frames ESG factors as relevant to long-term value creation because they are material to investment performance and responsive to investor concerns about issues such as climate change, workforce practices, and governance. The other views ESG considerations as ideologically driven, disconnected from wealth creation, and potentially inconsistent with fiduciary obligations.”
While the EU’s initial, almost zealous focus on ESG has materially softened, it continued to be an important element in investment decisions. EU investors tend to be consistent in requiring potential investment structures to involve ESG although it is fair to add there are variant views about what constitutes acceptable ESG investment. For example, since the outbreak of the Russia Ukraine war, there has been an active debate in the Dutch pensions industry about whether investments in armaments manufacturers are appropriate. Interestingly, this chimes with a recent study by Invest Europe, which found that 74 per cent of private equity GPs believe defence is now the leading sector for growth expectations, overtaking deep tech and AI.
Semi-liquid structures, fee discounts and transparency
Other considerations which are not necessarily region specific but should be addressed by a US GP actually or potentially focused on the EU market, include a preference for semi-liquid structures: This is a broader market dynamic driven by liquidity needs, and is thus of particular importance during this period of geopolitical disruption.
US GPs should also be aware that EU (and other) investors are increasingly looking for significant fee discounts. These tend to be required when investors allocate to less established managers, which family offices may do from time to time.
A further, overall market expectation, again not unique to EU investors, is the expectation that GPs will provide digital transparency and real-time reporting. Gone are the days when private capital investments were valued on an annual basis, and even then, the values were often simply estimated. Depending on the underlying assets of the strategy, LPs globally expect investor portals and apps with timely and comprehensive information.
Attractive strategies
In conclusion, US GPs must recognise that their natural or original investment focus – which may have played well in the United States, will not necessarily resonate in the EU or further afield. That said, Paul Daelman, CEO of Daelman Consulting, a third-party marketing firm, says he is still observing strong European LP demand for a diverse range of private equity strategies, including buyouts, growth capital, venture capital, distressed, special situations, and credit opportunities.
At the same time, European LPs are now convinced that the real estate market has finally bottomed out, again leading to a slight bump in allocations. This real estate resurgence comes amid the increasing demand for data centres, fuelled by the exponential rise of cloud computing and AI, along with the return to health of many commercial real estate properties as companies clamp down on remote working practices.
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Overall, EU investors are not fundamentally different. They are open to US strategies and US managers can check for investor appetite through pre-marketing. Where there is traction, setting up an EU parallel fund and outsourcing its operation to a service provider such as JTC allows efficient access to EU capital, with less complexity than often portrayed.
