What do you consider to be among the key trends shaping the private equity (PE) industry?
Current global trends include increased deal activity and exits in response to a lower interest rate environment and a convergence in price expectations. Political developments in the US may lead to the opening of additional pools of liquidity in response to industry lobbying to access retail investors’ pension funds, with anticipation of a buoyant US equities market providing opportunities to exit trophy assets.
European markets saw a significant decline in activity in 2024 but expectations are positive for 2025 seeing an increase in investment activities. The uncertain economic picture in the UK and the developing impact of the most recent budget on business may create opportunities to acquire assets with potential for significant operational improvements and the need for expertise and capital to deliver those. The expansion of private credit and alternative strategies looks set to continue into 2025, as does the pressure from limited partners (LPs) to deploy capital which, along with a more supportive interest rate environment, is expected to lead to an increase in activity.
Geopolitical risk remains a significant factor going into 2025 with a mix of conflict zones, international tensions and potential changes in the approach of the US to foreign trade all having the potential to significantly impact markets. However, firms are increasingly well placed to anticipate and adapt to the changing circumstances these present.
In terms of deal activity, which sectors or industries do PE firms seem to be targeting? Are you seeing any common themes in the way PE firms are approaching, negotiating and structuring these transactions?
Globally, we continue to see significant activity in the manufacturing sector where opportunities to make significant operational improvements within targets remain. The software industry has also been a main focus, along with high-growth potential technology companies. Interest in the insurance sector remains strong. In UK markets, financial services and wealth management have continued to be favoured, including consolidation transactions and investments in new platforms.
The regulated financial services sector in Jersey continues to see strong interest from PE investors with transactions at all levels of the market and significant potential for further consolidation in the market in 2025 in response to the increasingly global nature of the industry and the significant capital required to operate on this scale. At the mid-market level, a number of transactions in the past 12 months and the emergence of challenger firms in this space suggests that activity should continue in this space as well.
What methods are PE firms using to build value across their portfolios and improve returns on exit?
A combination of operational, strategic and financial initiatives continue to be deployed with the nature of the industry meaning there is no universal strategy. Most of these initiatives – operational improvements, revenue growth and strategic positioning – happen below the level of the fund itself or holding structures which are typically positioned in Jersey. However, Jersey is increasingly used to structure vehicles which are deployed as part of talent management strategies by creating management incentivisation platforms.
Typically structured as corporate vehicles and taking advantage of the flexible company law regime in Jersey, these platforms are an important part of the toolkit in aligning management interests and securing operational improvements. Managing ESG issues in response to increasing investor and regulatory focus in relation to these important areas has also become increasingly important, with an increased focus on reporting and standards in this area.
What legal and regulatory issues are shaping the PE industry at present? In your opinion, how will compliance obligations impact this asset class in the years ahead?
Increased ESG requirements and reporting obligations continue to have an impact and will increase in significance in response to a combination of investor demand and increased regulatory disclosure obligations. For example, the European Union’s Sustainable Finance Disclosure Regulation requires reporting in relation to both funds and portfolio companies. These requirements place increased requirements on service providers to funds in Jersey.
Taxation reforms continue globally, most notably the global implementation of the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two directive, which has been or is being implemented in a number of offshore jurisdictions including Jersey, through the adoption of the multinational corporate income tax (MCIT). The MCIT in Jersey applies the OECD Model Rules and only impacts multinational entities with a group revenue in excess of €750m. Importantly, the MCIT will not apply to ‘excluded entity’ funds but, in common with many other jurisdictions, is set to become an important part of the structuring of larger deals, in particular portfolio companies which meet the revenue threshold.
How has PE fundraising fared in recent months? In what ways does the relationship between general partners (GPs) and limited partners (LPs) continue to evolve?
Globally, we understand that the market in the US has continued to be challenging. The European market overall has shown resilience – albeit with a modest decline in fundraising – and Asia has faced significant challenges in attracting capital. Funds in Jersey have a global exposure but the UK and Europe remain our primary markets and that is perhaps reflected in the increase in both funds and assets under management in 2024.
Based on the most recently available data in the first half of 2024, the total net asset value of regulated funds increased by 4 percent annually, with alternative assets classes, including PE, accounting for 21 percent of that growth. As the interest rate outlook continues to improve and equity markets in key portfolio company jurisdictions provide increased liquidity allowing for exits and the deployment of significant dry powder, we would expect the fundraising environment to experience a significant upturn as investors seek to redeploy capital returned on exits.
This interview was first published in Financier Worldwide. See full article here: WORLDWATCH: Private equity — Financier Worldwide
