2016 Private Equity trends: Taking a closer look
Interview with Frank Fumai and Jason Menghi
Frank Fumai, national Audit leader for Deloitte’s Private Equity practice, and Jason Menghi, partner with Deloitte’s investment management practice, provide a view into expected trends and issues for the year ahead.
What are the top issues for the private equity sector in the coming year?
You’re going to see is an even stronger push for increased transparency with regard to fees, costs and fund allocation. The US Securities and Exchange Commision (SEC) has already started down this path with the larger players in the industry, so they essentially have a playbook now for addressing a wider range of private equity firms. They want transparency. And they’re not the only ones, either. So do large private equity clients such as pension funds. From formal regulatory pressure for more transparency to pressure from clients, expect this issue to grow in importance over the next year.
The SEC has developed something of a playbook for regulatory inspection. They’re getting more granular with their requests for information, and private equity firms want to ask themselves those same questions first. That takes a sturdy data infrastructure – and it’s unclear whether private equity firms overall have the tools, processes, and people in place to make it happen. It may seem odd to include data infrastructure as one of the top issues for this industry, but when you realize just how important transparency has become, infrastructure zooms up in importance.
Large private equity clients and the SEC are making a big push for increased transparency this year.
Where do you see opportunities for growth and innovation?
We’re seeing a lot of product innovation emerging. For years the industry has managed people’s money in a pretty uniform way—with sequential fund closings, for instance. Separately managed accounts… greater flexibility on everything from fee structures to investment periods… private equity firms are looking for ways to be more responsive to client needs. They’re being more flexible, and examining alternatives to the traditional structures.
Within portfolio companies, there’s also a lot of potential for business analytics to change the course of decision making. For example, say I have a hundred companies in my portfolio, each of which generates a ton of data. What are the trends we’re seeing across those businesses – in terms of everything from geographies, types of expenses that are growing at a certain rate, industries, you name it? This has generated so much interest that we’ve even seen firms productize their capabilities and sell them as a separate product. I think we’re just getting started in this area.
Firms are innovating to provide alternative product structures to be more responsive to clients’ needs.
What trends might disrupt “business as usual” in 2016?
The fight to raise capital is getting more intense, especially among midsized firms, and I think it’s entirely possible that it rises to the level of disruption in 2016. The money just flows more easily to the bigger funds for a lot of reasons, and it will be more disruptive within the industry as it gets more pronounced.
With the election, it will be a year to pay attention to tax reform and the rules around carried interest. There’s always a chance that executive compensation can become a campaign issue.
With the election year, firms should pay attention to tax reform and rules around carried interest.
What are some steps companies may take to better prepare for 2016 and beyond?
We see some of our clients increasing headcount, specifically focused on the processes and capabilities that need to be in place in order to be responsive to requests from clients and regulators. Some are hiring third parties such as valuation firms to help with resource-intensive – but increasingly important – tasks.
As with anything else, when people notice a company providing a valuable service, they consider investing. Firms that help with compliance are seen as valuable assets in this climate. And we’re seeing a trend in companies being a little bit more opportunistic in investing in compliance firms.
Finally, the issue of cyber security is unavoidable in this climate. This is a huge topic within private equity these days, whether you’re looking at your own data security or that of the portfolio clients you own.
We’re seeing a trend in companies being more opportunistic in investing in compliance firms.
What long-term disruptors could reshape the industry?
Cyber attacks are one of the biggest topics on the minds of all of our clients. It’s eye-opening for them to understand how someone would penetrate their network.
In this business, reputation is everything, and that can change overnight, whether it’s because of technology being so fluid, cyber threats, or a news story that reflects poorly on a firm’s protocol. With private equity firms there’s always the question of whether to worry about the portfolio of companies.
Systems, data, fundraising, and the market at large all have the potential to dramatically alter the landscape for PE firms going forward, but down the line, this remains an industry that has continually generated above-market returns. You don’t hear about pension funds going bankrupt because they invested in private equity.
We think we’re going to see a trend toward public investors—everyday people—figuring out ways to invest in private equity. An opportunity for the public to invest in this industry is going to have mass effect. Firms will be able to interact and maintain data with regular investors.
Cyber attacks are top-of-mind for our clients. Firms should be prepared to respond, especially when it comes to potential reputational damage.
Explore additional resources and insights
- Read our Financial Services Industry Outlooks blog series, which provides a teaser into our longer-term reports coming out next year.
- Register for our upcoming Dbriefs webcast on January 21 for more on the outlook for the investment management industry.
- Browse the 2015 Industry Outlooks.
- Learn more about the Deloitte Center for Financial Services.