IPEM October Letter – Face to Face 2.0

Dear IPEM friends,

Private equity is the ultimate people business. But in an era of remote working and social distancing, the asset class must adapt

Private equity thrives on human interaction. Whether it’s uncovering a hidden gem of a deal over waterside drinks at IPEM; the gut feeling you get when looking into the whites of a prospective management team’s eyes or a reassuring handshake from an institutional investor preparing to part with millions of dollars based purely on the integrity and skill of those in the room – this is a people business through and through.

Confronted with limits on non-essential travel, closed offices and restricted in-person contact, in many ways, the asset class has lost some of its identity. Certainly, the absence of face-to-face meetings was blamed for an initial drop off in deal activity – and fundraising – that rivalled that of the financial crisis. Private equity simply wasn’t set up to work in the cloud. This is an industry that prioritizes proximity. Just look at how firms congregate by postcode, in Parc Monceau, Mayfair, Park Avenue or Sandhill Road.

Indeed, in many ways, private equity has defiantly resisted the encroachment of technology in order to preserve a focus on relationships. There is a sense that the industry must not be stripped back to data sets and algorithms, but must continue to operate in the realm of what the Chinese call “guanxi” – a system of interconnecting networks that facilitate business based on trust.

It is futile to rally against reality, of course. Private equity is subject to the same upheaval as everyone else. There is a pronounced need for the industry to both accept change and to adapt. Crucially, however, it is also important to recognize that there could be advantages to being forced to adopt a new way of working – from a renewed emphasis on objective analysis to a shakeup of the old boys’ club.

Because it seems to me, that there are elements of the private equity industry that are more ready to embrace change than others. In fact, I believe that the pandemic is bringing a clash of cultures and generations that was already bubbling beneath the surface, to the fore.

This is particularly true in Europe. In the US, private equity tends to be far more of a meritocracy. Deals are completed, and funds raised, based on rational and clearly understood business codes. You don’t need to be members of the same club or to have gone to the same school 40 years previously.

But, of course, these white, male managing partners – of a certain age – (a stereotype that stands up to scrutiny) will not always be at the helm of their firms. In fact, GP Trends, a survey completed every year by Investec and Equistone Partners Europe, found that the proportion of GPs who believe their next move will be retirement, leapt from 18.8 percent at the beginning of 2020, to 31.4 percent in the midst of the Covid outbreak.

A new generation of managing partners will undoubtedly be breaking through in the next months and years to come, bringing with them the opportunity to create a new identity for the asset class. It is already clear that the most tech savvy firms have fared best in this environment. One top European VC that I recently spoke with, closed a high triple digit million-euro fund; launched the fundraising of a new strategy and invested in several deals without meeting any CEOs or advisers in person, all during lockdown.

And it seems as if many digital tools are here to stay, even after the crisis abates, as firms recognise the efficiency savings that things like videoconferencing and LegalTech solutions represent. A study recently completed by Elm Capital, meanwhile, suggests that virtual GP-LP communications may stay a permanent practice in investor relations after several large funds were raised in months, or even weeks, on Zoom.

Of course, not all firms were set up to manage the transition so succinctly. But perhaps the point is that they should be. Perhaps, the pandemic will leave the old European way of doing private equity in the past – and perhaps that is no bad thing.

Let me be clear, I still resolutely believe that private equity will remain a people business. Private equity should never become the “faceless finance” described by El Commandante Hugo Chavez. Indeed, whilst private equity will continue to make use of technology to improve efficiency – and will hopefully shake off the shackles of the old school tie – the human factor will only become more important in the wake of Covid-19.

As capital becomes a commodity, it has become palpably clear that it is people that are our most valuable assets. Trust in this industry is based not only on financial reports, it also a matter of personal ethics and accountability – you need only to look to the keyman clause. And, of course, private equity isn’t only about closing deals and funds. The asset class prides itself on creating value through “hands on” ownership – understanding the human dynamics that make a business tick and working side by side with those humans to make it grow.

As organisers of the best event in private equity, we are also subject to these tectonic shifts that are seeing technology and human interaction collide. We too have been exploring new ways of gathering people together and sharing ideas. We understand that you would no longer travel to a conference abroad if the value proposed wasn’t there.

After all, webinars are valid educational tools. Videoconferencing is perfect for catching up with contacts that you already know. And, in the near future, some digital platforms, enriched with data, will provide private equity professionals with effective tools to find investment opportunities and streamline the investment and fundraising process.

Yes, we need to adapt. Yes, technology should be embraced, and archaic practices left by the wayside. There is an exciting opportunity here for a new generation of private equity investors to reimagine the asset class. But, when they do so, make no mistake, human interaction will remain at its beating heart.