Forecast for storms
22nd February 2017
In an environment where predictions are at best difficult and at worst unwise, Augentius asked private equity managers and investors how they’re faring in current conditions, and what they anticipate happening next
Image: Shutterstock
In its survey of more than 200 private equity asset managers and investors from around the world, the Augentius annual industry survey attempted to shine a light on perceptions from inside the financial services industry, revealing a mixed bag of results.
When managers were asked about the state of the market in 2016 compared to 2015, and what they expect to see in 2017, significant regional differences emerged (click here for Figure 1). In the Americas, 2016 was generally considered an improvement on the previous year, and the trend was the same, albeit less dramatic, for managers in Europe, the Middle East and Africa (EMEA).
In Asia, however, respondents viewed 2016 in a markedly more negative light, with some 55 percent saying they thought 2016 was worse than 2015 for the market, compared to 20 percent saying the opposite. Out of the three regions, Asia is the youngest private equity and real estate market, and therefore potentially more susceptible to market volatility.
David Bailey, co-founder of Augentius and group head of marketing, communications and product development, says: “Over the last decade or so there has been substantial growth in the Asian market.”
“The industry in Asia primarily invests in Asian markets. Therefore, when asset managers see bumps on the horizon, such as the UK’s vote to exit the EU and Trump’s presidential election win, they may anticipate substantial sensitivity in their own markets. They’re not sure how it’s going to affect them, and that in itself is going to have negative effects.”
Looking ahead to 2017, the same trends remained. However, while the gap closed in Asia—with 40 percent expecting 2017 to be worse than 2016 and 30 percent saying things will improve—in the Americas, the majority, 61 percent, expect 2017 to be better for business than 2016 was, and only 14 percent are being more wary.
In EMEA, again, those who saw a positive year ahead outnumbered those who did not. The margins were smaller than in the other two regions, at 34 percent versus 22 percent, perhaps suggesting that the remaining 44 percent may simply not know what to think, given the current instability in the European markets.
Although, according to Bailey, European private equity managers said they hadn’t necessarily seen any effects, positive or negative, following the Brexit vote, he concedes: “It’s very difficult for anyone to say how it might affect people in the future.”
This year, Europe will see high-profile general elections taking place that have the potential to further disrupt the markets. In the Netherlands, the far-right presidential candidate Geert Wilders is an avid supporter of US President Donald Trump and his controversial closed-border rhetoric. Wilders’s campaign website purports a “Netherlands choosing for its own people” and even sports the hashtag #MakeTheNetherlandsGreatAgain.
The German federal election could see Chancellor Angela Merkel unseated, with Martin Schulz, former president of the European Parliament, reportedly vying for the position. But, with regards to the financial markets, it may be the French election that has the most dramatic effect.
As part of her campaign, right-wing French presidential candidate Marine Le Pen has proposed holding a referendum on revising the French constitution, expanding the scope of Article 11 and therefore paving the way for a further referendum on reforming economic policy.
Again, this echoes the anti-regulation, specifically Dodd-Frank, rhetoric that emerged in the Trump campaign, and bear similarities to his efforts to circumvent official channels in order to make the changes that the head of state desires.
Of course, this is currently all speculation, and even so, for the managers surveyed at least, Bailey suggests that life, in the long run, is likely to carry on as usual. He says: “There will be these bumps along the way. These managers look after funds that will be in existence for 10 to 12 years, and so, short-term, political ‘bumps’ don’t really bother them.”
What is shifting, at least in so far as the survey suggests, is the perception of the challenges in the markets (click here for Figure 2). The top challenge in the US emerged as fundraising, by a considerable margin, followed by market regulation and investment opportunities.
For EMEA managers, market regulation emerged as the biggest concern, followed by tax regulation, with fundraising posing a tertiary challenge.
The strain of regulation was, predictably, felt throughout all of the regions in 2016, with 42 percent of US and EMEA respondents citing it as a challenge, as well as 39 percent of those in Asia.
However, in the 2017 survey, while EMEA respondents appeared markedly more concerned about regulation—with half naming it as a challenge—those in Asia and the US had cooled off somewhat, with 38 percent and 34 percent highlighting it as an issue, respectively.
In fact, almost all of the challenges named in the survey have seen an increase in the percentage of EMEA managers that expressed concern. In the US, the opposite is true, with only the issue of limited partner (LP) communications and tax regulation seeing an increase in the numbers of those concerned.
The survey report suggested that those managers in the Americas may be less concerned about legislation under the Trump administration, anticipating more leniency in the coming months. At the same time in Europe, again, political and market instability has potentially led to increased concerns around regulation, tax, fundraising and investment opportunities.
Bailey says: “The vast majority are regulated managers, both by the European directives and by their own local regulators—regulation in the Americas and Asia is far less.”
“They have to spend a lot of time and effort focusing on, and complying with, regulation, and delivering regulatory reporting. They live in a very regulated world, and that is going to get more complicated.”
For the first time, the survey also took into account the challenges faced by investors around the world (click here for Figure 3). Here, again, there was a dip in the numbers showing concern around market regulation, suggesting, perhaps, that investors are becoming more comfortable in their respective new regulatory environments.
Concern remains around investment opportunities, which were cited as a challenge for more than 50 percent.
The survey report suggested that this is interesting, given managers’ concerns around fund raising. It asked: “Are fund managers not offering investors the investment opportunities that they want?”
Significantly more investors instead expressed concern around valuation than they did in 2016. Bailey speculates that this could be to do with the increased pressure that stakeholders are putting on the pension funds and insurance companies.
“They are having to justify evaluations and their asset allocations more and more to the people that invest in the insurance company, the pension fund, and so on. It is likely that general partners are going to have to give more evidence to support the valuations they’re coming up with.”
Indeed, a lack of transparency was also the main source of frustration among investors (click here for Figure 4).
According to the report, while investors are under pressure from shareholders to disclose more information than ever, managers’ reporting formats and content have not changed, “thus creating problems and issues that managers need to be aware of”.
While only offering a snapshot of the industry as per the opinion of Augentius’s particular respondents, the results paint a picture of a still-emerging Asian market holding tight through global upheaval and a US contingent feeling less constrained by regulatory burden, while EMEA managers batten down the hatches and prepare for the great unknown.
With a tumultuous 2016 behind us, and 2017 promising still more change, one can only guess at the trends that will emerge in next years’ report, and what the major changes will be. But, predictions are tricky at the best of times, so those managers looking forward to great things may be wise to be wary, yet.
When managers were asked about the state of the market in 2016 compared to 2015, and what they expect to see in 2017, significant regional differences emerged (click here for Figure 1). In the Americas, 2016 was generally considered an improvement on the previous year, and the trend was the same, albeit less dramatic, for managers in Europe, the Middle East and Africa (EMEA).
In Asia, however, respondents viewed 2016 in a markedly more negative light, with some 55 percent saying they thought 2016 was worse than 2015 for the market, compared to 20 percent saying the opposite. Out of the three regions, Asia is the youngest private equity and real estate market, and therefore potentially more susceptible to market volatility.
David Bailey, co-founder of Augentius and group head of marketing, communications and product development, says: “Over the last decade or so there has been substantial growth in the Asian market.”
“The industry in Asia primarily invests in Asian markets. Therefore, when asset managers see bumps on the horizon, such as the UK’s vote to exit the EU and Trump’s presidential election win, they may anticipate substantial sensitivity in their own markets. They’re not sure how it’s going to affect them, and that in itself is going to have negative effects.”
Looking ahead to 2017, the same trends remained. However, while the gap closed in Asia—with 40 percent expecting 2017 to be worse than 2016 and 30 percent saying things will improve—in the Americas, the majority, 61 percent, expect 2017 to be better for business than 2016 was, and only 14 percent are being more wary.
In EMEA, again, those who saw a positive year ahead outnumbered those who did not. The margins were smaller than in the other two regions, at 34 percent versus 22 percent, perhaps suggesting that the remaining 44 percent may simply not know what to think, given the current instability in the European markets.
Although, according to Bailey, European private equity managers said they hadn’t necessarily seen any effects, positive or negative, following the Brexit vote, he concedes: “It’s very difficult for anyone to say how it might affect people in the future.”
This year, Europe will see high-profile general elections taking place that have the potential to further disrupt the markets. In the Netherlands, the far-right presidential candidate Geert Wilders is an avid supporter of US President Donald Trump and his controversial closed-border rhetoric. Wilders’s campaign website purports a “Netherlands choosing for its own people” and even sports the hashtag #MakeTheNetherlandsGreatAgain.
The German federal election could see Chancellor Angela Merkel unseated, with Martin Schulz, former president of the European Parliament, reportedly vying for the position. But, with regards to the financial markets, it may be the French election that has the most dramatic effect.
As part of her campaign, right-wing French presidential candidate Marine Le Pen has proposed holding a referendum on revising the French constitution, expanding the scope of Article 11 and therefore paving the way for a further referendum on reforming economic policy.
Again, this echoes the anti-regulation, specifically Dodd-Frank, rhetoric that emerged in the Trump campaign, and bear similarities to his efforts to circumvent official channels in order to make the changes that the head of state desires.
Of course, this is currently all speculation, and even so, for the managers surveyed at least, Bailey suggests that life, in the long run, is likely to carry on as usual. He says: “There will be these bumps along the way. These managers look after funds that will be in existence for 10 to 12 years, and so, short-term, political ‘bumps’ don’t really bother them.”
What is shifting, at least in so far as the survey suggests, is the perception of the challenges in the markets (click here for Figure 2). The top challenge in the US emerged as fundraising, by a considerable margin, followed by market regulation and investment opportunities.
For EMEA managers, market regulation emerged as the biggest concern, followed by tax regulation, with fundraising posing a tertiary challenge.
The strain of regulation was, predictably, felt throughout all of the regions in 2016, with 42 percent of US and EMEA respondents citing it as a challenge, as well as 39 percent of those in Asia.
However, in the 2017 survey, while EMEA respondents appeared markedly more concerned about regulation—with half naming it as a challenge—those in Asia and the US had cooled off somewhat, with 38 percent and 34 percent highlighting it as an issue, respectively.
In fact, almost all of the challenges named in the survey have seen an increase in the percentage of EMEA managers that expressed concern. In the US, the opposite is true, with only the issue of limited partner (LP) communications and tax regulation seeing an increase in the numbers of those concerned.
The survey report suggested that those managers in the Americas may be less concerned about legislation under the Trump administration, anticipating more leniency in the coming months. At the same time in Europe, again, political and market instability has potentially led to increased concerns around regulation, tax, fundraising and investment opportunities.
Bailey says: “The vast majority are regulated managers, both by the European directives and by their own local regulators—regulation in the Americas and Asia is far less.”
“They have to spend a lot of time and effort focusing on, and complying with, regulation, and delivering regulatory reporting. They live in a very regulated world, and that is going to get more complicated.”
For the first time, the survey also took into account the challenges faced by investors around the world (click here for Figure 3). Here, again, there was a dip in the numbers showing concern around market regulation, suggesting, perhaps, that investors are becoming more comfortable in their respective new regulatory environments.
Concern remains around investment opportunities, which were cited as a challenge for more than 50 percent.
The survey report suggested that this is interesting, given managers’ concerns around fund raising. It asked: “Are fund managers not offering investors the investment opportunities that they want?”
Significantly more investors instead expressed concern around valuation than they did in 2016. Bailey speculates that this could be to do with the increased pressure that stakeholders are putting on the pension funds and insurance companies.
“They are having to justify evaluations and their asset allocations more and more to the people that invest in the insurance company, the pension fund, and so on. It is likely that general partners are going to have to give more evidence to support the valuations they’re coming up with.”
Indeed, a lack of transparency was also the main source of frustration among investors (click here for Figure 4).
According to the report, while investors are under pressure from shareholders to disclose more information than ever, managers’ reporting formats and content have not changed, “thus creating problems and issues that managers need to be aware of”.
While only offering a snapshot of the industry as per the opinion of Augentius’s particular respondents, the results paint a picture of a still-emerging Asian market holding tight through global upheaval and a US contingent feeling less constrained by regulatory burden, while EMEA managers batten down the hatches and prepare for the great unknown.
With a tumultuous 2016 behind us, and 2017 promising still more change, one can only guess at the trends that will emerge in next years’ report, and what the major changes will be. But, predictions are tricky at the best of times, so those managers looking forward to great things may be wise to be wary, yet.
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