While much has been written and spoken about the impact the current global health crisis is having on wealth management as a whole, less has been articulated about how it will affect Private Assets clients. Arnaud Garel-Galais, Group Head of Coverage & Business Development for PERES Global Services - Private Equity, Real Estate, Infrastructure and Securitisation, CACEIS is looking at this in particular.
The COVID-19 crisis has confirmed the resilience of private assets. It also confirmed the robust nature of CACEIS’ model: an integrated PERES (Private Equity, Real Estate and Securitisation) business line, with services delivered via dedicated staff based in local European offices and adapted to the needs of Private Equity, Real Estate, Infrastructure and Private Debt funds.
On 16th March 2020, in response to national lockdown measures, CACEIS rolled out a company-wide teleworking programme designed to protect staff and ensure business continuity for clients. A staff taskforce was mobilised to implement an IT infrastructure that permitted upwards of 90% of CACEIS’ employees to work remotely.
This large-scale teleworking programme enabled CACEIS to maintain client proximity through daily and weekly calls aimed at forecasting and tackling upcoming challenges to ensure uninterrupted client servicing. Client proximity, local offices and expertise are integral to CACEIS’ servicing philosophy.
Our ability to maintain business-as-usual thanks to our unique servicing model saw several clients launch new funds during the crisis, confident that service quality had remained high.
The CACEIS group as a whole was well-prepared to maintain servicing, and the PERES teams had no issues in handling its clients’ capital calls, distributions and investments, remaining responsive to their needs throughout lockdown.
Between March and May of 2020, whilst working remotely, CACEIS’ PERES teams ensured a smooth launch process for over 70 European domiciled private assets funds.
Private assets facing short-term challenges but a positive outlook
The COVID-19 crisis has triggered a financial shockwave that echoes the 2008/09 financial crisis – and an unprecedented situation due to lockdowns being imposed by government decree. For some sectors, COVID-19’s impacts will hit harder than the 2008/09 crisis: Tourism, Airlines, Retail, Automotive, Logistics. Other sectors will see a similar impact to 2008/09: Oil & Gas, Engineering, Construction, Pharma and Medtech. Financial Services will suffer in turn once defaults on corporate debt become an issue.
Clients’ portfolio valuations give a rough indication of the downward trends at -10% to -20% as of Q1 2020. Fund managers rarely re-evaluate positions at Q1, so the more significant drops will come in Q2 and on to the end of the year.
Despite this, the outlook for private assets remains positive. With more experience under their belt than in 2008, managers’ reaction times are now shorter, allowing for greater responsiveness for portfolio company protection measures, such as securing liquidity/governmental loans, having their portfolio companies drawing on their revolving facilities and working through debt rescheduling. Many have operating partners to help restructure portfolio companies. The majority of these measures were either not in place during the 2008/09 crisis, or were not implemented quickly enough.
In addition, with a crisis often come opportunities. Although private asset holdings may marginally depreciate, the last three years’ fundraising has been particularly fruitful. With $2tn of dry powder globally, and in excess of €300bn at European level, the next 2-3 years will see well-funded private assets managers acquiring additional assets at attractive prices. Funds starting their investment period just prior to the 2008/09 crisis period turned out to be strong performers, and those in a similar situation for the current crisis are unlikely to perform differently.
We see a short-term reduction in M&A and new deal activity, and according to a recent Preqin survey presented during the EMEA Webinar on 14th April, capital calls and distributions are forecast to drop by 40% and 20% respectively over the coming 18 months.
In April 2020, so partially incorporating COVID-19 impacts, Preqin surveyed some 200 LPs (institutional investors/limited partners) about their future allocation to private assets. 63% were planning no change in allocation ratio, and 29% were planning to increase it.
A “flight to quality” is likely to occur. Recently, CVC Capital Partners collected €21.3bn for their eighth flagship European and US fund, exceeding by far its initial target of 17.5bn. It is a strong indicator that well-established fund managers will likely raise the largest pools of capital. Further market consolidation via acquisitions of smaller firms is also forecast.
For the above reasons, the long-term outlook for private assets and private capital remains extremely positive, which for CACEIS as a leading European service provider to this asset class, is encouraging.
Key client servicing takeaways form our COVID-19 experience
As a service provider to a large number of leading fund managers, some of which we support with equity bridge financing, CACEIS is keen to understand COVID-19’s impact on their business. Monitoring our clients’ capital calls during April in our two largest hubs, we saw 70 France and Luxembourg domiciled funds calling over €2bn of capital. This included large funds with a diverse set of LPs from the US, Europe, Middle East and Asia. Our sample showed zero defaults and only 0.01% of capital paid with a delay of a few days (on average no more than five).
This crisis highlighted the importance of automation and standardisation to secure processes and reduce operational risk. Nevertheless, customisation and proximity remain key considerations. CACEIS’ operating model is robust, with global services delivered via local teams in European markets where our clients operate such as France, Luxembourg, Germany and Italy. The COVID-19 crisis has again validated our decision not to off-shore or near-shore teams and operational aspects of our business, and our clients have confirmed the effectiveness of our business model.
In times such as these, the cost efficiency of a fully off-shored model is bested by a combination of client proximity, multi-local model and a robust IT infrastructure. Client satisfaction surveyed throughout the crisis has been very positive and ratings were higher in 2020 post-COVID-19 than in 2019.
Our ability to maintain business-as-usual thanks to our unique servicing model saw several clients launch new funds during the crisis, confident that service quality had remained high. We look forward to bringing our services to new clients in Europe and further afield as the CACEIS Group’s network of local offices expands to new markets.