Euronext Funds360 - January 2021
2020 has seen a drop in Private Equity (PE) activity in Europe due to volatility and uncertainty induced by the coronavirus crisis, a well related phenomenon by organisations such as Invest Europe or European Investment Fund. However Deloitte started 2021 by sharing a more positive sentiment from actors of European PE through its latest periodic Deloitte Central Europe Private Equity Confidence Survey. The Survey reveals a complete reversal of market sentiment since the last Index in summer 2020, with the vast majority of deal-doers (63%) expecting an increase in activity in 2021, up from just 17% previously. Additionally, nearly three-quarters of deal-doers (73%) expect to buy more in the coming months, the highest proportion since 2011.
Prior to the crisis, the European PE landscape had been growing with 2019 seeing the highest number of private equity deals ever made in Europe according to Statista. This PE market evolution didn’t only concern the number of deals but the type of financial actors involved in them. Increasingly, individual investors have also been accessing the PE market thanks to PE funds. According to the European Central Bank, in the current low interest rate environment, euro area insurers have been venturing into alternative asset classes such as alternative, infrastructure and private equity funds, loans and real estate holdings. This phenomenon has helped investors diversify their portfolios as this unconventional class of investments had, until recently, been reserved for a so-called “professional” category.
Private equity involves injecting capital into an unlisted company at different key stages in its life, when starting up or when it encounters difficulties, for example. Private equity funds are characterized by the potential for attractive returns, a high level of risk, illiquidity and potential tax advantages. This investment class is often put forward because it helps finance a so-called real economy, such as helping the growth of innovative local SMEs (in sectors such as technology, health, environment, etc.). In Europe, the biotechnology and healthcare sector accounted for 20% of overall private equity investment in the first half of 2020, according to Funds Trade. On the other hand, the illiquidity and the uncertainty associated with the outcome of key phases of business development may be seen as risky issues. These alternative parameters complexify the decision to include private equity funds in units of account for a retirement plan, for example.
They therefore remain reserved for certain profiles of savers. For insurers, it is important to establish a risk profile of the client to determine his sensitivity to the possibilities of high returns and risks to his savings. It is also necessary to assess the importance of the time factor in his investments because private equity funds have a lifespan from 5 to 10 years. Also, to determine the place of a private equity fund in a portfolio, it is above all necessary to be demanding in the analysis and assessment of the viability of projects selected by the fund. As a financial actor in private equity, you must also be attentive and check the KIIDs beforehand, be aware of the fund regulations, the conditions for accessing them, the various fees and its schedule to fully understand what this type of alternative investment involves. It will be necessary to accept the specificities of a fund such as its initial lifespan, the associated earning potential and the tax advantages thereof. The European Solvency II prudential framework and transparency requirements are also an additional barrier for investors and asset managers, as obtaining information can be a daunting task.
The recent discussions between Euronext Funds360 and its partner Wizzinvest with their various investor / insurer clients have clearly demonstrated an increase in expectations regarding the transparency of alternative funds, including private equity funds. Three main reasons explain these “new” requirements:
reinforced regulatory obligations, in particular on the part of the ACPR
a possible reduction in the capital to be capitalized, the new version of the TPT V5 inventory allowing the identification of eligible unlisted assets
a strengthening of the monitoring of investments in this asset class with the “renaissance” of the Alt Exchange exchange format implemented on the basis of the recommendations of the ILPA.
The association between Euronext Funds360, European data providers and Wizzinvest, expert in investment transparency analysis, now allows, through its Solvency 2 Look-Through solution, to support the various actors in order to optimize the production processes of reports expected by end customers.