The main insights from the panel discussion at Loyens & Loeff's ‘The Future of Private Equity’ event.
Loyens & Loeff’s highly anticipated private equity event, centered on the theme ‘The Future of Private Equity’, and offered a deep dive into the challenges and opportunities facing the private equity (PE) sector today.
Read also: Private Equity of the Future: Insights from Loyens & Loeff annual market update
Following an inspiring keynote, a dynamic panel discussion brought together industry leaders: Jan Alexander, Secretary General of the Belgian Venture Capital & Private Equity Association (BVA); Sabine Vermassen, Managing Partner at Capricorn Partners and former Chairwoman of the BVA; and Peter Maenhout, Partner/CEO at M80. Moderated by Antoinette van der Hauw and Thomas Lenné of Loyens & Loeff, the discussion was rich in insights and reflections on the evolving landscape of private equity.
Market realities: Liquidity challenges and creative solutions
The panel kicked off with a sobering market update, where moderator van der Hauw acknowledged the tough conditions. "The search for liquidity remains the main challenge”, she said, setting the tone for a discussion that would repeatedly circle back to this issue.
Jan Alexander painted a nuanced picture of the Belgian market, admitting there are significant hurdles, yet highlighting the industry’s creativity in navigating them. "We see a lot of roll-overs and continuation funds, but they come with inherent conflicts”, he said, pointing to the delicate balancing act general partners (GPs) must perform. It is best to have external validation of the valuation with new shareholders investing alongside the GP.
Sabine Vermassen echoed Alexander's concerns, and pointed out that "We're looking at the M&A market, which shows some signs of recovery."
Peter Maenhout added that the liquidity crunch has shifted the focus within the industry. “The question used to be, ‘What’s the average return of your fund?’ Now it’s, ‘What is your DPI? How much capital have you returned?’ This pressure could lead PE firms to exit good assets prematurely”, he warned.
Maenhout also acknowledged the rising importance of secondaries. "This is very hot right now, but is there enough supply to meet demand? We’re lucky we don’t need a continuation fund, but the market is definitely feeling the pressure."
Specialization and market fragmentation
The fragmented nature of the Belgian private equity landscape was another key theme. Thomas Lenné noted that Belgium's market is more scattered than its neighbor, the Netherlands. This diversity - ranging from VC funds to public investors - makes consolidation unlikely, a sentiment Jan Alexander affirmed. "Everyone is innovating within their own niches. I don’t see much consolidation for the moment. This could change in the near future, if regulatory pressure becomes too high for certain GPs or when certain houses seeks to grow at a faster pace."
Specialization, Alexander argued, is crucial, especially in venture capital. "Effective sourcing is only possible if a VC possesses good sector knowledge. Founders on the other hand, choose you based on your unique expertise", he said, underscoring the need for a distinctive edge not just in VC, but also in PE.
ESG: From compliance to genuine impact
The conversation inevitably turned to environmental, social, and governance (ESG) factors, which have become increasingly integral to private equity strategy. “Sustainable growth is essential”, Alexander stated, highlighting the growing importance of ESG beyond mere compliance. “It’s something we have to do. Not just because we’re required to, but because it’s the right thing to do. We’ve been holding workshops on standardization, and on how to measure decarbonization, for instance.”
An audience member noted that the private equity industry is taking ESG seriously, partly driven by the availability of large government funds for sustainable investments. Maenhout distinguished between different types of ESG-focused investors. "Some take it very seriously, complying with Article 8 because they manage pension money. Others only do what comes naturally, and then there are true impact investors, which is an entirely different story."
Maenhout emphasized that his firm is committed to making a tangible impact. "When we exit after four to seven years, the company is better with a stronger management, better processes, more jobs, and lower carbon emissions. That’s how we measure our success."
Vermassen agreed, observing that ESG has become mainstream, especially for VC firms that can guide smaller companies in implementing sustainable practices. “It’s a huge benefit for these companies”, she said.
The growing administrative burden
While the panelists were largely optimistic about ESG’s role in shaping the future, they all expressed concern about the growing administrative burden it brings. Vermassen warned that for smaller teams, the workload is overwhelming. Maenhout pointed out that complying with ESG standards is increasingly costly, requiring outside consultants. "For new entrants, this is a real barrier."
Despite the challenges, the panel agreed that ESG is here to stay, with Vermassen and Maenhout both noting that Scandinavian PE firms are already tying ESG metrics to performance-based compensation, known as ‘impact carry’.
Conclusion
As the discussion drew to a close, the panelists acknowledged the complexity of the future for private equity.
Thomas Lenné summarized: "We’ve discussed several challenges: rising borrowing costs, sluggish fundraising, and increased regulatory pressure, among others. However, these challenges are not without solutions. We also touched on the critical importance of ESG compliance, not just as a legal requirement but as a long-term value driver for future success. ESG is set to become an important component of investment strategy, despite the burdens it places on firms. A key takeaway from today’s discussions is that adaptability and innovation will continue to be essential for private equity funds and the broader growth of the industry. Funds that can adjust to changing conditions will remain successful in the future.”
The panel left the audience with much to contemplate, especially around how to balance growth, profitability, and social responsibility in an increasingly regulated and competitive environment.
Private Equity Summit 2024 - Buy & Build
Join us on December 11 at Private Equity Summit 2024 - Buy & Build. The M&A Community Belgium has joined forces with Loyens & Loeff to organise a unique Private Equity event. Private Equity Summit 2024 brings together top experts in Private Equity and Venture Capital, reflecting on past developments and looking ahead to the hottest topics.
Get more information and register here.
