The rise and rise of private capital

As the planet faces an existential crisis, the world’s largest economies teeter on the brink of recession and global challenges around access to energy, healthcare and critical infrastructure continue to tax the brightest minds, the need for private capital to step up is pressing.

Private funds are where the action has been since the global financial crisis. Fund managers have raised an astonishing $10.7 trillion in capital over the last decade and are, currently sitting on $12.8 trillion of assets under management, according to Preqin data. The alternatives industry ended 2022 with a record $3.7 trillion in dry powder that GPs will now be eager to put to work, as investors continue to back the private markets and funds look for investment opportunities.

It is little wonder that institutional LPs currently favour the private markets. The number of US public companies has declined by a third over the last 25 years, according to a recent report by Bain & Company, with the remaining pool dominated by a small number of big tech players. Private market returns, on the other hand, have outpaced public markets over every time horizon and continue to grow.

Big private equity funds – a global force to be reckoned with

The big private equity funds are now global forces to be reckoned with. In 2020, the American Investment Council estimated that private equity directly employed 11.7 million workers in the US alone, an increase of 3 million over just two years at that point. And that investment touches every corner of the economy: PE investments in healthcare have increased more than 20-fold over the last 20 years, spanning nursing homes to hospitals and ambulatory services, while PE has invested at least $1.1 trillion in the energy sector over the past decade and owns half of all daily newspapers in the US.

Private credit is a $1.4 trillion asset class that’s predicated to reach $2.3 trillion by 2027

Alongside buyout funds taking control of major businesses, private credit has grown to become a $1.4 trillion asset class that is predicted by Preqin to reach $2.3 trillion by 2027. Large direct lenders now outpace banks as some of the biggest lenders to corporates in the US and Western Europe, giving them a powerful front row seat as those borrowers navigate the liquidity challenges of a macroeconomic downturn.

With infrastructure funds increasingly backing government initiatives to build a more resilient, sustainable, and inclusive society ‘build back better’ post pandemic, funding transportation, energy and digital networks, we also see venture capital financing a global revolution in software and technology. Real estate funds are taking an ever-increasing slice of our offices, shopping centres, homes and factories, highlighting how the power of private capital in today’s interconnected global economy cannot be overlooked.

Private equity ESG investments estimated to be worth $1.2 trillion and growing

Alternative investment funds can be an incredible force for good, as we have seen with the industry-wide push into ESG imperatives over the last few years. It is now almost impossible to find a PE fund that is not at least focusing some of its might on improving the environmental, social and governance metrics of the companies in which it invests. At the same time, the global impact investing market – where funds seek to generate positive, measurable social and environmental impact alongside a financial return – is already thought to be worth $1.2 trillion and is growing fast. Whether powering the transition to net zero, supporting investments in healthcare and education, tackling unemployment or driving for a more diverse and inclusive society, these funds have the ability to make real change.

Regulation & growing investor scrutiny

Still, with great power comes great responsibility and, as private capital continues to penetrate all segments of our lives, investment managers can expect increasing attention from regulators and growing scrutiny from investors. The attractive returns generated by these funds are drawing the attention of professional investors who require enhanced regulatory protections; the environmental claims made by funds make them vulnerable to claims of greenwashing; and the lucrative profits made by fund managers are in the sights of the tax authorities. As giant GPs seek to diversify their sources of growth by tapping new investors and moving into more asset classes in more geographies, the complexity of their businesses means they can no longer run the lean operations that typified their early years.

Yet with scale and regulation comes plenty of opportunities as well as challenges for managers. As the world’s largest funds jurisdictions bring private funds within the scope of their regulation and seek to show a flexible and proportionate approach to oversight, managers can pick and choose between different regimes and alternative structuring options to tailor their fund propositions to the specific needs of their investors.

Jurisdiction selection

Identifying the most appropriate jurisdiction and structure from day one can help eliminate some of the uncertainty currently challenging large institutional LPs from both a fiscal and a political point of view, allowing managers to differentiate their offering in a crowded fundraising market. The best option will be different every time, depending on each fund’s unique strategy and investor base, but with adequate research managers can turn the additional costs and administrative burdens of compliance into a badge of quality for LPs.

How ZEDRA can help

As the industry gets ever-more complex, third-party fund administrators like ZEDRA can help guide clients through the entire life cycle of a fund, from the initial concept stage, through the execution of fund formation, to ongoing operational delivery and then supporting with end-of-life closedown. Bringing a wealth of experience across jurisdictions, fund structures and asset classes, and with familiarity of dealing with a broad client base, we can help funds respond decisively to escalating regulatory scrutiny and intensifying LP reporting requirements. In a fast-moving market, there are few issues we have not navigated before and plenty that we can anticipate before they cause problems. As private capital continues to power forward, we look forward to remaining at the vanguard as managers position to thrive.

For more information on how we can help you with all aspects of fund administration, please contact Mark Cleary, Funds Client Director, ZEDRA Jersey or Philippa-Lucy Robertson, General Counsel, ZEDRA Cayman Islands.