IPEM Cannes 2024 – The Daily Spin – January, 25th
The shifting role of LPs was the overarching theme for the morning session of Day 2, at the 10th edition of IPEM in Cannes. After a full day of yoga,…
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LP power shift means traditional allocation trends can no longer be assumed
How confident are LPs today as they assess their private markets portfolios and try to determine what the best path should be?
It is a big question, made all the harder by the growing sense of uncertainty ahead of a historic period of global elections where more than 2 billion people will cast their votes.
“Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.” – Karl Von Clausewitz, Prussian general and military theorist.
Even though private equity still dominates total industry AUM like Jupiter dominates our solar system, some investors are finding virtue – and confidence – in other alternative assets such as private credit and infrastructure.
Institutional allocators – even those next door to one another – have divergent views on many other aspects of private markets, which is why IPEM Paris 2024 is setting the stage for two days of lively, perhaps even heated, debate on “Forging Confidence”.
The LP theme to this year’s event kicks off with an LP-only session at Le Méridien Étoile on Monday 9th September. After an LPAC lunch, global LPs will discuss how to forge confidence from a Research & Practice perspective. One of the panel debates will also focus on: “All-time high bargaining power – implications for LPs.” A series of breakout sessions will cover areas including Portfolio Construction Dilemmas and Liquidity Options: the Good, the Bad, and the Ugly.
On September 11th IPEM Paris will continue the LP-centric debate with a full day of panels to determine what the consensus is on topics including, What LPs think of sophistication and product innovation; Managing trillions and still delivering on returns; DDQ or BBQ? Cooking up tough questions for GPs and The new wave: LPs on the allure of emerging GPs.
“The bargaining power has shifted to LPs,” remarks Antoine Colson, CEO and Managing Partner at IPEM.
“This shift in power is prompting them to review their GP relationships. Re-upping was almost expected a few years back but that’s no longer necessarily the case. They want to explore new relationships, especially in the mid-market. At the same time, you hear about LPs wanting to build different relationships with GPs – more strategic, more aligned, more collaborative.
“As they review their allocation programs, other asset classes like private credit and infrastructure are becoming more popular.” And so the stream of confidence meanders over time.
KfW Capital is one of the largest LPs in European venture capital. It is a government-backed entity, similar to British Patient Capital in the UK, and is a subsidiary of KfW Group, the world’s largest national development bank. “We have been investing in European VC since 2018. We invest across all sectors from life science to ICT, from the early stage until the late stage/pre-IPO. We require that portfolio funds invest at least one commitment in Germany. Our mission is to develop the VC ecosystem in Germany and Europe,” says Dr Joerg Goschin, Co-CEO and Senior Managing Director at KfW Capital.
KfW Capital last year launched “Wachstumsfonds Deutschland” (which translates as Growth Fund for Germany), a EUR1 billion fund-of-funds to invest in Germany’s technology start-up marketplace, making it one of Europe’s largest VC FoFs. The fund vehicle is a key element of the German government’s EUR10 billion Future Fund initiative, which KfW is coordinating.
This is an investor with no lack of confidence in Europe’s VC investment potential. “We see investment activity picking up again. Compared to the same quarter last year, capital calls have increased by 25% in our portfolio of more than 110 VC funds,” says Goschin.
When asked about his outlook for Europe, he responds: “There is light at the end of the tunnel. 2021 was the absolute peak in the VC market, followed by a downturn caused by geopolitical challenges and changes in the interest rate environment. Now, this dry powder meets quite attractive investment opportunities at significantly lower valuations, so current European VC fund vintages look promising. Noticeable sector specialization also shows the market has matured and we now see an increasing number of institutional investors turning their attention to European venture.”
Crucially, European governments led by Germany, France, and the UK, are putting their full support behind VC. President Macron spoke passionately about this topic last month, ahead of VivaTech in Paris. As the global AI revolution intensifies, France is launching a new fund to invest exclusively in AI and the quantum ecosystem, of which EUR400 million will be used to develop AI research and talent across nine universities.
“Our professional manager selection process targets the best-performing VC funds from a risk/return perspective,” explains Goschin. “The quality of the management team is one of the most important selection criteria for us. Besides track record, we also want to understand the fund manager´s ability to create value for their portfolio companies.”
He points out that European VC has outperformed US and Asian VC funds consistently over the last 10 years.
It will be interesting to see what the wider LP views are on the VC asset class during IPEM Paris, which will also feature a wide range of summit sessions and breakout sessions. One of these sessions will focus on Independent Sponsors. The independent sponsor – investing deal by deal alongside investors without the formality of a fund structure – has been well established in the US for some time but it is inchoate in Europe. For some investors who want to build confidence in alternative assets beyond PE buyouts, it could be a good way to develop new GP relationships.
“There aren’t a large number of them in Europe compared to there being over 1,000 such sponsors in the US ecosystem. It is a model that will grow in Europe, as LPs build conviction, in the coming years,” suggests Colson.
How LPs think about sophistication and product innovation is also expected to elicit a wide range of opinions in Paris. Especially as GPs begin to look beyond the closed-ended fund structure to widen out their product offerings and attract a wider base of investors. This is already gaining traction with the use of evergreen semi-liquid fund structures – some of which are using the ELTIF 2.0 wrapper, which is designed to finance the real economy.
How LPs view these innovations, over the coming years, will be interesting to observe. There will be those who favor evergreens, and those who will look upon them with skepticism.
Partners Group has long been a pioneer in product innovation to best serve its investors. They understand the challenges of managing liquidity in running an evergreen fund, where liquidity is controlled by either fund gates or redemption queues.
“It is crucial for investors to have confidence in a manager’s portfolio construction since the way capital has been invested will determine whether an evergreen fund will be able to successfully service outflows. However, it is important to highlight that only over long periods of market stress will it become clear which managers have truly prepared for this scenario,” says Andrei Vaduva, Co-Head of Portfolio Management, at Partners Group.
Another area that can be challenging is delivering disciplined growth. As evergreen funds can accept inflows on an ongoing basis, a manager might be tempted to capitalize on current momentum by fundraising as much as possible.
However, maximizing fundraising can create portfolio imbalances with Vaduva emphasizing: “Ensuring vintage diversification is absolutely essential to ensuring the sustainable growth of the fund.”
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Over 6,000 delegates from 2,000 firms, including 1,000 LPs and 700 GPs, will be there, don’t miss the opportunity to connect with them!
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