They all focused on Private Markets, but were also quite different.
PEI Nordics in Stockholm focused mainly on private equity.
0100 Mediterranean in Milan focused mainly on VC but with an ‘allocation’ for buyout. As one attendant in Milan quipped “With VC in the main room and PE in the basement, the world is literally upside down”.
The European Alternative Investments Conference in Copenhagen focused on academic / research insight and was the more thought provoking of the three.
Turnout was very good
And being smaller, they were a bit more intimate and drew in LPs that are not natural attendants at the larger conferences. The LP audience in Stockholm was more institutional, Milan was well-attended by family offices, and in Copenhagen it was the broader Danish alternative investment community.
At all three conferences it was easy to meet and talk to people and make new connections. The ratio of GPs to LPs was also more equal than the usual 10:1, probably making the latter feel less like hunted prey.
We could not attend all sessions. But those that we did catch, were notably all high quality and not just marketing pitches.
Are socks a predictor of sentiment?
Colourful socks seem to be out, replaced with dark or at least mono-colour. I am not sure if this is seasonal or if it reflects a tough macro environment, but it did seem to reflect a more sombre / reflective mood.
Going forward I will pay more attention to this possibly overlooked indicator and look out for correlation and causation.
Before diving into some of the detail, here are my key take-aways
There is highly likely much more risk embedded in the portfolios of both GPs and consequently LPs than we may think / be aware of.
The current investment landscape is fraught with heightened uncertainty due to a myriad of risks, including geopolitical tensions, elections, trade disputes, economic fluctuations, and currency volatility.
GPs must adapt their strategies to navigate the complexities.
LPs, especially the larger more sophisticated investors, are pivoting their portfolios closer to home, seeking better risk-adjusted returns.
Delayed distributions are significantly impacting re-ups. This has been particularly noticeable in the ‘retail’ segment, where returns have fallen short of expectations and promises.
There is a shift in allocations, with increased interest in private debt and secondary markets.
The mid-market has been good for LPs, offering opportunities in late primary investments and co-investments.
European General Partners (GPs) are increasingly specialising by strategy and sector, aiming to build regional champions.
The macroeconomic changes demand that GPs move away from reliance on leverage as a return driver. Instead, they must focus on robust value creation strategies, emphasizing governance, operational improvements, and strong executive teams.
This shift underscores the importance of demonstrating tangible value creation to meet LPs’ growing expectations.
Intra-vintage performance spreads are widening and the divergence among GPs is becoming more pronounced, raising the stakes in an already challenging environment.
Now, diving a bit more into the details
Fundraising is what everyone is talking about and not talking about
Fundraising is currently facing its toughest environment in over 25 years. LPs are over-allocated (especially to Buyout and VC) and increasingly selective, cutting back even on established relationships (re-ups) as they grapple with stretched budgets and tighter targets.
The piggy bank is empty, or is it half full?
Exacerbating this, meetings with LPs are hard to secure, and those that do happen often focus on future funds rather than the current one.
GPs consequently must work harder to differentiate themselves and secure fresh commitments.
Superficial generic product pitches don’t resonate in this climate; GPs need to show depth and alignment with LP priorities. I.e. know your customer!
The fundraising environment favours LPs
Given the above, GPs are now more responsive to LP inquiries than in the past. It used to be that GPs did not reply to emails from LPs (ghosting apparently goes both ways). Now, as fundraising pressures mount, LPs find it easier to gain access to sought-after GPs, shifting some leverage back in their favour
In an environment where fundraises are so drawn-out, LPs are also more hesitant on being part of a first close.Not only because they can now afford to wait for a late close, while still assured they will get in and then benefit from the early investments. But also, because LPs are in increasingly concerned about failed fundraises and the implications this may have on strategy and on the team.
Notably for GPs, several LPs mentioned this was now an important diligence point and a key consideration at ICs.
There are some early bird discounts trying to tempt LPs to commit to earlier closes. But these incentives have not changed much and, to be enticing for LPs, they must be both more meaningful and present a fair deal for LPs, not least if it is a re-upping LP.
The GPs must work harder – performance is table stakes
LPs are looking for GPs who can deliver strong returns. But assuming you do get in the door performance alone is not enough. LP also demand transparency, credibility, and nuanced market understanding.
GPs must in turn deliver a well-differentiated, transparent, and scalable offering that not only meets LPs' financial expectations but also aligns with their evolving focus areas.
This requires GPs to build / set up their organisations to be able to deliver these things. This will likely squeeze the smaller GPs favouring those with scale - more on this in another post.
To raise their funds GPs increasingly need to be able to go ‘global’ in their fundraising. Seeing the usual suspects and the LPs in their home area is not enough. This, even with a good Placement Agent is a further challenge for GPs with small teams.
Finally, GPs must consider internal alignment on the implications of lower demand and prolonged fundraising timelines. It is essential to avoid challenges in team cohesion and strategy execution as fundraising windows stretch out. In other words, it may not be your fundraising team that is entirely responsible for lack of fundraising traction!
ESG is here to stay, but there is fatigue among both GPs and LPs.
Yet another conference and yet another panel on ESG. Is it possible to have a conference today and not have a panel on ESG?
I did notice that the attendance seems to be going down, at least relatively speaking. And it seems more and more attended by the ‘practitioners’ of ESG ensuring that everyone is in pre-agreed agreement.
ESG - everyone has another question!
Many LPs, especially the Nordic ones, are becoming more demanding around (ESG standards, creating opportunities for GPs who can authentically align with these values.
LPs are setting up specialized “buckets” for targeted investments, like climate initiatives, opening doors for those GPs prepared to meet niche needs. However, the need for global reach to secure these potential new LPs poses logistical and strategic challenges, especially for smaller teams without established international networks. That brings us back to the advantages of scale.
Broad recognition of the importance and value creation potential of ESG.
But, while most are reluctant to say so out loud (there is a not insignificant risk of getting stoned), ESG fatigue is also starting to set in. The rules and reporting guidelines (think SFDR) are not always clear, the goal posts keep moving, each LP has their own set of questions and reporting requirements.
The cost of this is now getting very tangible for both LPs and GPs but is seemingly not really considered or discussed. Though likely controversial his is an important discussion to have and I will dive into it in a future post.
Another tough year for exits
Not much of a surprise here, we have been hearing that the whole of this and last year. And I cannot help but start wondering, if this common mantra for GPs is also not becoming a convenient excuse for many GPs for failing to create exits?
Afterall, some GPs seem to be doing just fine on exits and DPI regardless of a tough exit environment.
LPs are obviously disappointed that distributions are not ticking in, as promised, like clockwork and in line with their models. But this has never been the case in private markets and underscores that LPs need to be much more sophisticated in their portfolio construction and thinking / planning for liquidity.
20% of exits this year is continuation vehicles
In this exit environment continuation vehicles (CVs) are an increasingly attractive alternative for many GPs to selling ‘trophy’ assets. It can generate some much-needed liquidity for GPs and meaningful distributions for LPs.
CVs are here to stay and are a legitimate exit option. But LPs should in general be very conscious of CVs. And, among other things, carefully consider, what the actual motivation for a CV is, what the definition of a ‘trophy’ asset is (this differs quite a bit depending on which GP you ask), who is leading the transaction, how much of the proceeds are being rolled over, what the terms and conditions are.
And finally, if the GP in question is simply selling to themselves whether they are doing the job for which they are paid. I.e. buy something (well), do something (good) with it, and sell it again. Does this merit the same amount of fees and carried interest. This is another important topic that I will dive deeper into in another post.
A couple of exits thoughts for GPs
The panels on exits were not groundbreaking in their takeaways, but what was discussed is nonetheless worth repeating.
Exits across asset classes can be ‘engineered’ / planned. After 3 - 5 years there is often a need for fresh capital and possibly re-energizing the ownership / cap table. Also, even if the IPO market is dormant, large corporates are still ready to buy growth and good assets.
Thus, it is critical that companies no matter the stage are ‘always’ exit ready and the exit should be part of the initial investment thesis and should be regularly revisited.
Here having an exit committee or a portfolio monitoring team to drive the process is not only a good idea but is getting more and more common. Importantly an exit committee should be separate from those who made the investment, and it should ideally be data driven.
Even if performance is currently great and the potential for a better outcome still exits, a ‘dispassionate’ exit committee is more likely than the deal team to also consider the risk and take money of the table.
There is some light at the end of the tunnel for exits
Secondary funds and CVs are, as mentioned, doing well, strategic acquirers are active and the IPO market is awakening.
There is still a gap in valuations, but helpfully the companies have started to grow into the valuations and valuations are again starting to increase. This will help support a better exit environment.
But for LPs this critically does not necessarily mean that the GP has done well!
What LPs want, was one of the most well attended panels – not least by GPs!
LPs are generally ‘ok’ with CVs / liquidity solutions but there was strong agreement that they should be used for the right reasons, i.e. not to sell an asset because you cannot get rid of it any other way.
In other words, GPs need to be able to rationalise to LPs why they are opting for these solutions and make it worthwhile for LPs to partake.
In line with this, LPs noted that the process around ad CV and can be rather opaque which makes them ‘suspicious’! Their words, not mine and probably not great if you are hoping they will use the proceeds to re-up.
LPs are continuously reassessing their portfolios.
There are no ‘easy’ re-ups and LPs may cycle out of GPs’ funds that are growing out of the LPs’ investment areas. Many LPs are still consolidating the GP roster, but, and this is good news at time where it seems that the largest GPs are hoovering up all the available capital, many LPs were also clear that there is room for new managers.
As an example, the EIF noted that the market is evolving rapidly, which for them is leading to accelerated rejuvenation of their portfolio. They have gone from a historic 30% new managers per annum to upward of 60% in a portfolio of 600 relationships and 1,600 funds. Thus, good news for GPs, there is, as is also the EIF mandate, room for new GPs that support the strategy of the EIF, i.e. EU priorities, which is often easier for new GPs, who can move faster, than for the existing GPs.
LPs were in very clear agreement that terms should be fair
Something that should be easy to do if there is good communication, clear objectives and transparency. Also, and I think this is worth noting for GPs, LPs explicitly mentioned that it is important that GPs don’t push too far in one direction. It should still be a carry and not a fee game.
A last point in this panel that LPs made to GPs was, that if a GP has a specific strategy is it really important that they are serious about it. I.e. how will the GP actually do this more than just a nice marketing message. In other words as an example, beware of green washing the LPs are aware of this and paying attention.
LPs were concerned that some GPs have seemingly started to opt for co-investment vehicles and potentially investing alongside other GPs so as to avoid relieving LPs of scare liquidity and hopefully ensuring that distributions were instead used for re-upping.
LPs (finally) recognise that benchmarks are close to useless
This should be common knowledge, but at least more and more LPs are finally starting to recognize the limitations of traditional benchmarks and are relying less on them.
Proprietary benchmarks are an alternative to the readily available or GP generated benchmarks but constructing them is often cumbersome and relies on having sufficient high-quality data. As a ‘short cut’ many LPs are starting to use Public Market Equivalent (PMEs) instead.
There is also increasingly broad recognition among LPs that access to first-hand data, that enables deeper portfolio analysis and insights, is far more valuable than relying on data vendors whose databases are of questionable depth and quality.
Finally, LPs are starting to look at metrics like individual company growth and leverage comparing them against listed companies. This is an interesting development and can potentially provide a nuanced perspective.
Unfortunately, more high-quality data, proprietary benchmarks, and company level metrics and analysis, requires significant resources and effort, which may not always be possible for all LPs.
However, to at least make more informed decisions and possibly drive better risk adjusted returns it is increasingly critical that LPs can do this.
At Balentic we saw this need and we are working on several solutions that will help all LPs to do this and more, faster and cost efficiently.
Wishing all my readers a merry Christmas and a happy New Year, thank you for reading and see you in 2025
The opportunity to create efficiency is everywhere...
Stay illiquid!
Kasper
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