PwC’s asset management leader Mike Byrne looks at how the Channel Islands’ private-markets sector can be both an engine of growth and a force for good in a changing world
OVER the past 40 years, the private-markets sector (often known as alternatives) has grown to become a bedrock of high-value employment and prosperity in the Channel Islands.
In Jersey, private markets now account for nearly 90% of funds under administration. In Guernsey, private markets are helping to fuel the impressive recent growth in fund values.
As assets under management in private markets continue their rapid expansion worldwide, they are set to play a key role in driving recovery and creating more sustainable and socially inclusive economies both here and across the globe.
Moving into the mainstream
What then do I mean by private markets and why are they so critical to all our futures? The private-markets designation brings together private capital (private equity and credit) and real assets (infrastructure and real estate). Both private equity and real estate are especially strong here in the Channel Islands. At PwC, we have consciously moved away from the term ‘alternatives’ as these asset classes are now very much part of the mainstream.
As investors go in search of returns that other asset classes may struggle to deliver, private markets are one of the fastest-growing areas of asset management globally. Earlier in the year, we published Prime time for private markets: The new value creation playbook, an in-depth exploration of how the sector is evolving and how to capitalise on the potential. Under our base-case growth scenario, we anticipate that private markets AuM will increase by $4.9 trillion to reach $14.4 trillion by 2025, around 10% of overall AuM worldwide.
New rules for a new game
As our Prime time for private markets report highlights, however, this is an increasingly challenging market in which the prizes will be hard won:
In search of return
With entry multiples so high and economies still fragile, traditional value levers such as financial engineering and cost reduction may no longer be enough to deliver target returns. Forward-looking private markets managers are therefore broadening their value creation lens in areas ranging from strategic repositioning and top-line growth to longer hold and ‘permanent capital’ models.
Competing in a concentrated market
Institutional investors’ growing demand for multi-asset mandates is making it difficult for smaller, single-asset-focused managers to compete with big, diversified rivals. There is still room for specialised players with the right capabilities. The firms that are most vulnerable are those that have neither scale nor specialisation. They risk being squeezed out of the picture.
Keeping pace with changing stakeholder expectations
The other, and in many ways most far-reaching, challenge is the shift in stakeholder attitudes. As environmental, social and governance priorities in areas such as health, sustainability and social inclusion come to the fore, ESG performance has become as important as financial returns. This is not just altruism. As pension and sovereign wealth funds’ private markets allocations increase, reflecting the ‘people’s priorities’ will be ever more important in securing large mandates and sustaining scale and growth.
Embracing ESG would help private-markets managers to reframe public perceptions, cultivate closer affinity with investors and generate new forms of value. Investment opportunities include helping portfolio companies to move towards net-zero production. Private-markets managers could also help to bridge the funding gap for small and innovative growth businesses and boost infrastructure investment in areas ranging from healthcare to digital communications.
With government coffers drained by the Covid-19 pandemic, the record levels of dry powder at private-markets managers’ disposal could make them a vital contributor to recovery and regeneration – a Marshall Plan for the 21st century. This would need to be weighed against the increased public scrutiny that would come from a more prominent role in socially-critical areas such as small business finance and infrastructure development.
Seizing the opportunity
The Channel Islands’ specialist expertise, record of innovation and supportive regulatory environment put them in a strong position to take advantage of private markets expansion. But just as the sector as a whole must adjust to a changing world, firms here in the Channel Islands need to work out how to sustain relevance and, where possible, take the lead.
Picking your spot
The most crucial decision is whether to be a scale or niche specialist player. Even within the subsidiaries and support services of larger groups, it is important to think about why business would want to come here and how to build on these standout capabilities.
Further questions centre on how to address changing investor demands. The ever-increasing risk of being called out for ‘greenwashing’ is a clear case in point. As a result, governance – the G in ESG – is rightly at the centre of the agenda. Yet, the response can often be reactive – closer monitoring and control of existing policies. However robust, this approach can still leavefundamental issues unaddressed. Chief among these is gauging what investors really want and how to stay ahead of the game – the goalposts are moving all the time.
It is also important to determine what qualifies as an ESG investment and how to report this in a credible way – the criteria are still vague and even at times contradictory. Rather than tighter oversight, it might therefore be more effective if boards could get inside the minds of investors and use this insight to develop and challenge assumptions and strategies. Ensuring boards are attuned to changing investor sentiment would in turn call for more diverse and inclusive membership.
The need to create more diverse boards is just one of the areas where a deepening of skills and talent availability is so critical. Increased talent demand from private markets can only add to the growing skills shortages in areas ranging from green investment to data analytics. Stepping up the recruitment and upskilling of women in the Channel Islands would enable firms to tap into a still largely underutilised pool of local talent. Attracting more women into private markets would also help to reduce the gender pay gap locally by opening up more opportunities for high paid employment.
Earning the right to win
The evolution and expansion of private markets offer the win-win of high-value economic growth locally, and an opportunity to help address pressing social and environmental priorities globally. But all those involved in the sector – including PwC as advisers – need to earn the right to win. How are investor demands changing? How can the Channel Islands keep pace? What can we offer that other financial centres can’t?