Forecast for storms
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

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.

Features
The latest features from Asset Servicing Times
The Financial Conduct Authority’s study of the asset management industry revealed issues around pricing and transparency, and uncovered cracks in some managers’ methodologies. Stephanie Palmer explores the findings
In a climate of regulatory change, cost pressures and cyber threats, the network management industry will be at its strongest if it sticks together. Stephanie Palmer reports from The Network Forum in Warsaw
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Regulation and technology were still the hottest topics in town at Fund Forum International in Berlin. Stephanie Palmer reports
As the active-passive fund debate reaches fever pitch, there is a third option, says Broadridge’s Stephanie Clarke
Asset managers are increasingly relying on data, and the service providers that can manage it, heard attendees at London’s TSAM conference
As the long-standing Barclays Point risk analytics solution winds down to retirement, investment managers have some tricky decisions to make, according to Confluence’s Katie Kiss
Fund administrators could be best off leaving back-office technology upgrades to the professionals, says Kelly Ashe of Pacific Fund Systems
In the search for alpha, appointing an investment fund and a management company can bring myriad benefits, says Eduard von Kymmel of VP Bank
View features section
Country profiles
The latest country profiles from Asset Servicing Times
The Asian market may be improving on the harmonisation front, but the situation is still far from ideal. Experts discuss what there is still left to do
Brazil is hogging the limelight from its South American neighbours. But, although reforms are in full swing, there is still work to be done
Securities Lending Times

Visit our sister site
for all the latest securities lending news and analysis

securitieslendingtimes.com
No nation is an island, and the Polish CSD has post-trade services to cater to all of Central and Eastern Europe, says KDPW’s Iwona Sroka
In a region as geographically, culturally and economically diverse as Asia, funds passports have a tricky road ahead if they’re to redefine the industry
Amid cross-border restrictions and tightened belts, Luxembourg’s kingdom of real estate investment won’t be crumbling any time soon
The Chinese market has taken a knock to its confidence, but despite its size, it is still merely an emerging market, and must take these setbacks in its stride
Rich in sunshine, cork hats and tired clichés, Australia’s funds industry doesn’t buck the trend, boasting record levels of assets under custody
As the Saudi Arabian stock exchange finally opens its doors to foreign investments, the influx from abroad will be in baby steps, not leaps and bounds
View country profiles section
Interviews
The latest interviews from Asset Servicing Times
When it comes to technology, the payments industry should not be too focused on winning the race, says Mike Laven of Currencycloud
Real Estate Investment Times

Visit our sister site
for all the latest real estate investment news

realestateinvestmenttimes.com
View interviews section